Daily Management Review

Euro reaches record high thanks to the North Korean missile


Euro/dollar exchange rate has risen to the highest level in more than two and a half years. Breaking psychologically important mark at 1.20 in the morning on Tuesday, August 29, it took just one and a half hour on the global Forex currency market to climb right up to the mark of 1.2070. After that, there was an imminent rebound after such a sharp movement to about 1.2020 in the afternoon. Nevertheless, the European currency has not been so expensive on the world market since the beginning of January 2015.

The Tuesday's jump in the rate of the European currency was a reaction to the next launch of the ballistic missile by North Korea, which this time flew over the territory of Japan. Everyone in the world perceived this as a very serious aggravation of the already tense situation in the region.

International investors working in the stock and commodity markets reacted as usual: they reduced risks. Namely, they sold shares and bought particularly reliable government bonds, for example, Japanese and German, as well as gold. The price of the noble metal, considered a good anti-crisis asset, soared in the morning on August 29 to the highest level since November 2016.

Reaction of the foreign exchange market, however, was unconventional. In the past, international investors usually went into the dollar as geopolitical tensions grew. The US monetary unit has enjoyed the reputation of "quiet harbor" for decades. This time, however, investors bought the euro.

Thus, they further strengthened the trend observed since January of this year towards the strengthening of the European monetary unit. 2017 started with one euro costing less than $ 1.05. Now it costs more than 1.20. Thus, the euro rose in price by about 15% for eight months. 

This indicates resurgent international interest in the common currency of the 19 member countries of the European Union. This interest is fueled by a very stable and gradually accelerating economic growth in the euro area. According to the results of the second quarter, it was, according to the latest data, 2.2% in annual terms.

At the same time, the countries that suffered the most from the recent debt crisis in the euro zone are developing particularly fast (2.8-3.5%) and were forced to implement programs of austerity and radical reforms, requesting international financial assistance. Namely, it is about Portugal, Cyprus, Spain, as well as Ireland, where growth at the beginning of the year exceeded 6%. And even Greece begins to emerge from years of severe depression. The country’s government believes that the Greek GDP will increase by 2% this year.

The relatively weak results of the opponents of the euro and the victory of pro-European parties in the parliamentary, presidential and regional elections in the Netherlands, France and Germany also contributed to the growth of confidence in the single currency. The upcoming parliamentary elections in Germany on September 24, according to polls, will further strengthen the positions of the supporters of the European Union and the common monetary unit.

As a result, the monthly index calculated by the consulting company Sentix for the eurozone's collapse was in August near historical lows. Of the 1000 professional investors interviewed, only 8% expect that in the next 12 months one of the countries of the monetary union may abandon the euro.

source: dw.de