On Wednesday, the euro dropped almost a half a percent after hitting a new three-year high above $1.23 as many investors increased their bullish bets on the currency.
The concerns among some European Central Bank policymakers regarding the euro’s strength, a remark by ECB policymaker Ewald Nowotny that the euro’s recent power against the U.S. dollar is “not helpful” triggered a period of profit-taking prior to next week’s policy meeting.
“The euro’s strength will cause some concerns to the ECB and it will definitely complicate their policymaking thinking, and some investors are taking profits after the recent rally,” said Adam Cole, a chief FX strategist.
The general dollar weakness and increased optimism regarding the outlook of this year’s European economy has encouraged the euro’s continued rally following 2017’s gain of over 10 percent.
The gain of over three percent in the last two weeks has led some ECB officials to voice their concerns. Vitor Constancio, the vice president of the European Central Bank, stated he did not rule out that monetary policy would still continue to be “very accommodating for a long time”.
THE HERALD FINANCE REPORT
Start your workday the right way with the news that matters most.
Jens Weidmann, Germany’s representative on the ECB’s policymaking said it would be “appropriate” for the ECB to end its bond purchases, which are scheduled to run until September.
“The ECB is playing the good cop and the bad cop in terms of their comments over the euro but there is no doubt the currency’s rally has sowed the seeds of uncertainty in the minds of ECB policymakers,” said Viraj Patel, an FX strategist.
In Asian trading, the single currency climbed to a session high of $1.2323 against the dollar before dropping 0.44 percent to $1.2210. The latest positioning data revealed that net long euro positions are at record highs.
Morgan Stanley strategists believe if inflation expectations are continued to be met and growth stays strong, the euro’s strength will be permitted by the ECB.