Remember Europe? Here’s why the euro is surging back

I am sure readers will have different memories of Europe. For those that have travelled or migrated from there, perhaps there are some very happy recollections to be had.

For others maybe the massive sovereign debt crisis still remains fresh in their minds. There is somewhat of an eerie silence at the moment that has allowed the euro currency to rally having traded at its highest level against the greenback in two years recently.

Why has the market forgotten about Europe?

There are a few reasons I can identify. It’s hard to believe that almost two years have passed since Mario Draghi replaced Jean-Claude Trichet as president of the European Central Bank (ECB).

Late last year, Draghi publicly stated the central bank would do “whatever it takes” to save the euro and announced they are willing to buy government bonds. Now this bond buying program is nothing new for financial markets as we have seen just about every other central bank in the world do the same thing – quantitative easing or QE as it’s referred to.

QE policies serve to weaken a currency, so why has the euro gone higher?

If you remember, Europe was on the brink with the currency seemingly heading for collapse and the union destined to be broken. There was a serious confidence crisis which led to a massive devaluation in the currency at the time. The ECB’s stance has restored some calm to financial markets that has alleviated some of the major funding issues the sovereign nations of Europe faced – higher borrowing costs from high interest rates on bond markets.

In addition, the absence of any new debt flare-ups amongst any of the sovereign nations or their major financial institutions has also helped calm the waters. So as counterintuitive as it may seem, an increase in the money supply via QE in Europe has actually seen the euro go up in value.

It’s all relative

The other major shift has been in attitude towards the US economy and its currency. For the majority of 2013 the markets believed the US Federal Reserve Bank would begin to wind back its own QE program. This saw some renewed strength in the US dollar and subsequent weakness in the EUR/USD to 1.2800 in July 2013. Remember currencies trade on relative value, i.e. one currency against another, so as USD goes up EUR goes down and vice versa.

More recently, however, since the US Federal Reserve has pushed back expectations for scaling back QE and the USD strength has reversed, sending EUR/USD back towards two year highs around 1.3800 at the time of writing.

So it appears no news out of Europe is good news, and if this continues we could see more euro strength in months to come.

Jim Vrondas is chief currency and payment strategist, Asia-Pacific at OzForex, Australia’s leading international money transfer service. OzForex‘s cutting edge technology powers foreign exchange services for 100,000 private and institutional clients across six continents, and the company is a key provider of forex news.