Credit: REUTERS/DADO RUVICSept 22 (Reuters) - EUR/USD rose on Thursday but only after Japan's intervention triggered a wave of dollar sales, demonstrating the scale of assistance it would take to spark a significant euro rally.
Before the BOJ intervened, EUR/USD hit a fresh 20-year low as investors priced in a higher terminal U.S. rates EDH3 after the Fed delivered hawkish projections on Thursday. EUR/USD rallied as high as 0.9908 after the intervention, but the gains were already eroding in early U.S. trade.
The dollar still holds a significant yield advantage over the euro even after protracted tightening in German-U.S. 2-year spreads US2DE2=RR, which has not been enough to reverse EUR/USD's down trend.
The ECB would have to become much more aggressive with rate hikes than currently expected to significantly diminish the U.S. yield advantage, but there are reasons to doubt it will.
The potential for escalation of the Ukraine war could keep energy prices elevated this winter, leading analysts to expect a harsher recession.
Deutsche Bank expects euro zone GDP to fall near 3.0% by mid-2023 https://bit.ly/3C1BF6a, which could temper the ECB's hiking enthusiasm and prevent EUR/USD from mounting significant rallies.
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(Christopher Romano is a Reuters market analyst. The views expressed are his own)
((christopher.romano@thomsonreuters.com;))
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
