Euro clears $1.30 for first time in over a year
The euro shot above $1.31 on Friday for the first time since April 2005, extending sharp gains made this week as a combination of euro-positive factors finally triggered a break-out of long-established ranges.
Upbeat German economic data and policymakers' comments have reinforced expectations of higher euro zone interest rates going into next year, while central bank reserve diversification away from the dollar has come back to the fore. Friday's move higher was heightened by thin, nervous trading conditions due to the Thanksgiving day U.S. holiday Thursday.
The dollar slid across the board, hitting its lowest level against the British pound in almost two years.
"The market is sensing the potential for a big move before the end of the year. We have illiquid trading conditions over this period and people are taking advantage of that," BTM-UFJ currency economist Derek Halpenny said.
By 1230 GMT, the euro had risen over 1 percent on the day to as high as $1.3109, its strongest since April 2005 and just over 5 cents away from a record high set in late 2004.
Prospects of a slowdown in the U.S. economy and potentially lower U.S. interest rates have combined with concerns about fundamental economic imbalances to put the dollar under pressure.
Economic advisers to President George W. Bush on Nov. 21 cut their forecasts for growth next year on a weaker housing market. Gross domestic product will increase 2.9 percent next year, slower than the 3.6 percent forecast in June, the Council of Economic Advisers said.
Traders are betting the Fed will cut borrowing costs in 2007.
However, if the current decline lasts a soaring euro could lower the horizon for European Central Bank interest rate hikes, changing the dynamics. Interest- rate futures show traders expect the Frankfurt-based ECB to raise its main rate twice more to 3.5 percent by year- end, with one further increase by March 2007.
Many investors, meanwhile, have been wondering how long the currently benign financial market climate can last, expecting a trigger of some sort to shake things up.
Citigroup Private Bank, for example, has been telling its wealthy clients that December and January are historically the best months for hedge fund returns, implying volatility.