Contrasting Central Bank Policies Sink EUR/USD

The U.S. Dollar rallied against a basket of currencies on Thursday, closing at its highest level since January 10. The upside momentum created by the move suggests bullish investors are going to make a run at the December 31 close at 91.501.

June U.S. Dollar Index futures settled at 91.365, up 0.412 or +0.45%.

Two catalysts played a role in generating the upside momentum. Traders said rising U.S. Treasury yields prompted bearish investors to aggressively unwind major short positions. Additionally, the dollar index was boosted by a steep drop in the Euro that was driven lower by a dovish tone in the European Central Bank’s Monetary Policy Statement.

This week, the benchmark 10-year U.S. Treasury yield breached the psychological 3-percent level, making the dollar a more attractive investment, boosted by a combination of worries about rising inflation and increased debt supplies as a result of President Donald Trump’s tax cuts and spending plans.

Additionally, diminished concerns over U.S.-China trade relations have encouraged investors to shift their focus to interest rate plays.

Traders also said there is an element of position-squaring underpinning the U.S. Dollar after global investors built massive short positions against the Greenback in response to trade frictions and geopolitical events tied to the “Trump Premium”.

EUR/USD

The Euro plunged against the U.S. Dollar on Thursday to its lowest level since January 12. The sell-off was fueled by dovish comments from ECB President chief Mario Draghi, who acknowledged evidence of a “pull-back” from exceptional growth readings seen around the turn of the year, although the central bank sought to bolster expectations for a gradual withdrawal of its monetary stimulus.

The European Central Bank (ECB) held interest rates steady on Thursday, amid signs the Euro Zone’s growth outlook may have softened. The ECB’s interest rate on its main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at zero, 0.25 and -0.40 percent respectively.

ECB President Mario Draghi also said “underlying strength” in the Euro Zone’s economy continued to underpin the bank’s confidence despite signs of “moderation” in recent weeks.

Finally, the ECB said in a statement, reiterating its long-standing guidance on interest rates that “The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of net asset purchases.”

The contrasting monetary policies of the U.S. Federal Reserve, which is likely to raise interest rates at least two more times this year, and the dovish European Central Bank, is helping to make the U.S. Dollar a more attractive investment.