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Euro surges against peers amid strong German business confidence data

TradingPub Admin | December 19, 2012

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The euro zone's common currency spiked to its highest point in 16 months against the yen and its highest in eight months against the dollar on December 19, as news of strong German business confidence provided market sentiment with a boost.

The euro increased to as much as 112.49 yen, which was its highest value against the Japanese currency since August 2011, Reuters reports.

The common currency increased to $1.3308, which was its highest against the U.S. dollar since early April, according to the media outlet. By mid-day, the euro pared some of these gains to trade at $1.3242.

"The euro is doing well across the board and there are fundamental drivers here," Vassili Serebriakov, currency strategist at BNP Paribas in New York, told the news source. "We had good data from Germany, plus we're getting the sense that there is a smooth resolution of the Greek problem."

Reuters reports that the ICE Dollar Index plunged to a two-month low of 79.008 before recovering slightly to reach 79.273. This dollar index was valued at 79.285 by 2:45 p.m. New York time, according to Bloomberg News. This index gets a substantial portion of its weighting from the euro.

German Business Confidence 
The Ifo institute’s business climate index, which is derived from a survey of 7,000 executives, rose to a reading of 102.4 in December from 101.4 the month before, according to the media outlet.

December was the second month of higher figures after the index dropped to its lowest in two-and-one-half-years in October. The monthly figure surpassed the prediction of  arise to 102 that was predicted by economists participating in a Bloomberg News survey.

"German Ifo helped us get to the $1.33 level on the euro, but with year-end there is limited participation." 

Fiscal Cliff 
Another factor that could impact the movements of currencies including the euro is the ongoing budget negotiations happening between Washington lawmakers. Bloomberg News reports that the dollar and yen both appreciated against their major peers amid an announcement made by President Barack Obama that he wants to put a plan in place to lower the deficit by Christmas.

"Markets are tracking the fiscal cliff news -- markets have been relatively complacent on the cliff as we’ve seen wide expectations for a deal to be reached by the end of the year," Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York, told the news source. "German Ifo helped us get to the $1.33 level on the euro, but with year-end there is limited participation."

Economic Risk 
The budget negotiations have attracted significant media attention in the recent past. If lawmakers are unable to resolve their disputes related to budgeting and tax policy, it will result in more than $600 trillion worth of tax increases and spending cuts being automatically triggered beginning in 2013.

Such an event is widely expected to present the global economy with a significant headwind, and the Congressional Budget Office has predicted that the fiscal cliff would push the U.S. economy into recession in 2013.

In addition, the budget cuts and new tax revenue needed to avert the fiscal cliff could also cause the economy to go into a downturn. Harvard economist Martin Feldstein recently said that this fiscal tightening could cause a recession.

Any significant change in the direction of the U.S. or global economy could motivate global investors to display an ever greater preference for safe assets than they are now.

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