Why Currencies Are Poised for More Shifts

The world’s major currencies, which had traded in a relatively stable range, are now in motion — buffeted by different regional growth and interest rates as well as a simmering brew of geopolitical tensions.

Differences are particularly noticeable between the U.S. and Europe, and how far apart currencies in those regions move will be a function of monetary policy at the European Central Bank (while the ECBmeets this week, its major policy actions are likely to come in autumn).

Last week’s economic data confirmed that the euro area and the U.S. are on quite different growth trajectories. Their banking systems are also in different stages of healing. The U.S. is growing faster and mending more quickly, so we should expect a widening diversion in monetary policies. Look for a gradually less accommodating Federal Reserve while the ECB seeks to further loosen its monetary and credit policies. In short, the dollar should continue to appreciate against the euro.

Geopolitical factors also favor a stronger dollar, largely because Europe is more economically and financially exposed to developments in Ukraine and the Middle East than the U.S. Moreover, the euro once enjoyed support from global traders chasing yields on peripheral euro-zone bonds — but there is less capital at work in that realm now.

Read more here : http://www.bloombergview.com/articles/2014-08-04/why-currencies-are-poised-for-more-shifts

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