After steady gains in the euro/U.S. dollar (EUR/USD) stalled near all-time highs in the $1.36- 1.37 zone in late April, shifting perceptions on Fed policy sparked a U.S. dollar rally into mid-June.
“The euro has been drifting lower since the end of April,” says Jim Glassman, senior economist at JP Morgan Chase. “There has been a shift in perceptions that the U.S. is not as weak as people had thought. Back in February, people had been talking about recession.”
However, the Fed’s decision to leave U.S. interest rates unchanged on June 28 gave new life to dollar bears in late June.
Heading into mid-summer, most economists agree growth-rate differentials are improving in favor of the U.S. However, the key to EUR/USD strength and direction in the weeks and months ahead will depend on whether the stronger growth forecast for the U.S. in the second half pans out and how high the European Central Bank (ECB) pushes its repo rate later this year.
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