The US dollar surged against a basket of major currencies in Tuesday’s trading session, boosted by a weaker euro as fears over political uncertainty in France, Greece, the Netherlands and Germany put the single currency under pressure.
Additionally, the euro was also hit after European Central Bank President Mario Draghi hinted that the bank may not scale back its stimulus program in the near future.
Today, the euro was set for its biggest daily decline in 2017 against a broadly stronger greenback.
EUR/USD hit more than one-week lows of 1.0662 and is currently trading at 1.0659, down 0.83%. The pair has been climbing steadily since the beginning of the year, but is currently starting a downtrend.
“The euro is on the defensive with markets nervous not only about European political risks but also the upcoming reduction in ECB bond purchases,” stated Jeremy Stretch, head of currency strategy at CIBC.
“All in all it’s been a virtuous tailwind for the US dollar this morning and there is also fear of capital flight (from China) which is feeding safe-haven flows.”
The dollar has previously weakened amid a lack of clarity on US President Donald Trump's economic policies, such as plans for fiscal stimulus and tax cuts which would be positive for the dollar. However, Trump's current focus on trade and immigration since taking office is seen as negative for the US currency. The greenback posted its fourth straight weekly decline last Friday after the latest US employment report revealed that while employment growth beat forecasts in January, wage growth remained tepid.
The US dollar index climbed 100.65 as of writing, recovering after more than a month of declines as it held on to overnight gains. From its worst start to a year in three decades, the greenback is currently on track for its biggest daily gain since early January.
Overnight gains began when China reported its foreign exchange reserves surprisingly plunged below $3 trillion level in January for the first time in nearly six years.
Political uncertainty, stimulus program
Concerns over the possibility of a shock result like Brexit or Donald Trump’s victory in the White House in France’s upcoming presidential election have hit sentiment on the euro. The election will be taking place on May 7, 2017.
Marine Le Pen, the head of the far-right National Front party, commenced her presidential bid on Sunday with vows to leave the euro zone and protect France against globalization. Investors fear that the Eurosceptic candidate was gaining momentum ahead of the election this spring.
Meanwhile, the euro was further dragged by fears over Greece’s bailout and elections in Germany, Netherlands and possibly Italy.
Separately, a report showed that investor sentiment in the euro area somewhat worsened in February, amid worries that the Trump administration’s policies will act as a hindrance on global growth.
The single currency also came under additional selling pressure after ECB Head Mario Draghi downplayed appeals for the bank to scale back its stimulus program on Monday.
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