On Tuesday, the euro traded near its highest level in three years against a weak dollar, on optimism of an improving economy in the euro zone. The euro closed out 2017 with its best year against the dollar since 2003, with boosted European economies and the increased expectation that the European Central Bank will relax its monetary policy.
On the first trading day of 2018, the euro added to last year’s gains moving upward 0.6 percent to a four-month high of $1.2081. The euro also outperformed the Japanese yen at 135.64, touching levels not seen since 2015.
“It’s a combination of dollar weakness and euro strength. The euro strength is underpinned by some hawkish comments from the ECB’s Coeure,” said currency strategist Thu Lan Nguyen, referring to comments made by Benoit Coeure of the European Central Bank.
Over the weekend, Coeure stated that he foresees a “reasonable chance” that the bank’s bond purchases will no longer be in effect after September. Nguyen added that the euro was nearing levels where the ECB might start to show uneasiness as it advances.
The euro improved as the dollar was broadly weak. The dollar’s index against a basket of six major currencies dropped to 91.75, the lowest level since September. The dollar index lost over 9.8 percent for 2017, it’s worst yearly performance since 2003.
Alvin Tan, an FX strategist believes that the rally in commodity prices had diminished the demand for the dollar and that the euro was gaining due to the restored economic performance of its member states.
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“Fundamentally, what is helping the euro is the brightening economic outlook in the euro area. The momentum should continue,” he said. Tan forecasts the euro will improve to $1.25 by mid-2018.
According to foreign exchange strategists, traders were cautious to take on large positions prior to Wednesday’s introduction of the sweeping EU financial markets directive dubbed MiFID II, which is intended to make European markets more clear.