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#1 15-09-2020 09:33:05

johnedward
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From: Paris - France
Registered: 21-12-2009
Posts: 2881
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EUR/USD: has the pair hit a peak?

EUR/USD: has the pair hit a peak?


Last week's ECB meeting was closely monitored by euro traders. For the first time in some time, the ECB decided to include the exchange rate in its statement.

The G10 countries agreed not to mention the exchange rate when setting monetary policy. Thus, whenever a central bank member of a G10 country was asked about the level of the exchange rate, the appropriate response was "no comment".

But that changed and, to the surprise of many, the ECB intervened when the EUR/USD reached the symbolic 1.20 level. The ECB's response was "no comment".

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The effects of a strong currency

A strong currency reflects the economic growth (strength) of a country/region. If the central bank does its job (i.e., fulfills its mandate) and sets the level of interest rates according to its mandate, the strength of the currency reflects the economic strength.

However, a currency must have a term of comparison - a reference point. In this case, another currency. Currency pairs in the exchange rate dashboard do not tell the same story as a single currency. So the ECB complained not about the strength of the euro, but about the eurodollar's exchange rate. The EUR/USD price is a problem, not the strength of the euro as a whole.

Since Trump won the White House four years ago, he has complained about the strength of the dollar. Until Trump's arrival, the "strong dollar policy" was the norm whenever the Treasury mentioned the dollar. So was the "no comment" agreement among the G10 countries.

When the pandemic hit the U.S., the Fed calmed down as never before. It lowered rates to the lower limit and committed to keeping them at that level for some time. It even changed its mandate, focusing more on the inflation component at the expense of the employment component.

No one wants a strong currency simply because it makes a country's products and services more expensive. A strong currency is at the expense of declining exports, which directly affects the current account of a country or region. A weaker currency is therefore desirable, especially in times of crisis.

For the time being, the level of 1.20 seems to be the ECB's "intervention" level. It is not the first time that it has intervened verbally when the EUR/USD reached 1.20. Nor will it be the last time.

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"Anything worth having is worth going for - all the way." - J.R. Ewing

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