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Euro Surges on Dovish Fed, Capped by Debt Warnings

March 21, 2019 at 16:19 by Andrew Moran

Euro coins and EUR banknotes closeupThe euro is rallying against a basket of major currencies on Thursday, buoyed by a dovish Federal Reserve. The gains were capped by a new report that sounded the alarm about public debt binges that threaten the stability of the currency.

On Wednesday, the US central bank left its benchmark fed funds rate in the 2.25% to 2.5% range. It also reaffirmed its dovish stance by confirming it plans to raise interest rates just once in 2019 and potentially none next year. This is a reversal from its previous estimate of at least two rate hikes this year. The Eccles Building noted that it will wind down the runoff of its $4 trillion balance sheet in May and end by September. It further slashed its gross domestic product (GDP) growth estimates to 2.1%, from 2.3%.

This was a boon for the euro, which has gained about 2% against the greenback so far this month. Recently, the European Central Bank (ECB) announced a new round of cheap loans to financial institutions and postponed the timing of its first post-recession rate hike to 2020.

While there has been improving economic sentiment in the region, it is evident that the eurozone cannot handle any incremental increases to borrowing costs.

The head of the Czech Republic central bank, Jiri Rusnok, warned that eurozone nations’ public debt increases are threatening economic and monetary policymakers in the trading bloc. Rusnok noted that the debt levels that have spiked since the global financial crisis have left governments unable to boost growth through fiscal stimulus progams.

Rusnuk told the weekly Euro magazine on Monday:

The euro zone, or some of its less successful parts, aren’t in very good condition. A huge problem is the long-term, almost 20-year-long, stagnation of Italy. If it starts to grow, it will be out of trouble very soon. But it isn’t growing, and it’s the third-largest economy in Europe if we don’t count the UK.

So, like it or not, the euro is still not out of the woods. Another test of its resilience may come, and the ECB would be, in that case, in a pretty difficult situation.

Eurostat data does show that debt has risen in most eurozone member states, particularly in Greece, Italy, Belgium, Spain, and Ireland. With the ECB projecting slower growth – 1.1% in 2019 – the regional economy is unlikely to grow its way out of this stagnancy.

The EUR/USD currency pair tumbled 0.46% to 1.1362, from an opening of 1.1414, at 15:58 GMT on Thursday. The EUR/CNY fell 0.36% to 7.6133, from an opening of 7.6414.

If you have any questions, comments, or opinions regarding the Euro, feel free to post them using the commentary form below.

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