The euro rose above the 1.20 level against the greenback on Tuesday on growing geopolitical tensions between North Korea and the U.S. A stronger euro means that European products become more expensive in international markets, which could decrease foreign appetite for European goods and thus hurt EU economies.
Countries like Portugal and Spain owe much of their recovery to exports. In Spain alone, exports have been higher than those of Germany, France and Italy (the biggest EU economies) since last year, according to data collected by TS Lombard.
John Hardy, head of forex trading at Saxo Bank, told CNBC Wednesday that “we have seen a near term peak of sorts triggered as the EURUSD and dollar Index breached key levels, but the pullback suggests the USD weakness has extended too far.”
The focus has started to shift towards Frankfurt where European Central Bank President Mario Draghi is due to speak next week, following a monetary policy meeting.
Investors had been hoping to get some indications about the bank’s program to exit monetary stimulus but the recent uptick in the euro raises doubts that the ECB will announce such details.
Easy monetary policy suppresses the value of a currency and the potential end of this policy in the euro zone is seen as one of the key reasons why the euro is currently rising. A strong currency also acts as a deflationary pressure at a time when the central bank wants to bring core inflation up in the region.