Euro zone economic optimism grows, euro rises

LONDON, U.K. - On Monday, the euro climbed to a three-year high to the dollar, as it neared the $1.23 line. 

With the growing economic optimism in the euro zone, investors ramped up bets, rebalancing their portfolios towards the region.

Expectations are high that the central bank may tighten the policy soon.

As the market opened on Monday, euro bulls received a shot in the arm after data showed the trade surplus in the 19-country euro area rose to its highest level in eight months.

The rise in the currency also coincided with a fresh leg down on the dollar. 

According to the latest futures data, speculators boosted net long positions in the euro to a record high in the week to January 12. 

The euro is at its highest since late 2014 against a basket of currencies.

As markets grow increasingly confident that a global recovery would outpace U.S. growth, the dollar weakened.

According to JP Morgan strategists, eurozone’s economy is set to outpace that of the U.S. in 2018.

On Monday, the dollar was down 0.5 percent, against a basket of currencies - its lowest since early 2015.

The dollar slipped to its lowest since mid-September against the Yen, dropping 0.4 percent at 110.585 yen.

Kit Juckes, London-based global strategist at Societe Generale said, “There will be a correction [for the euro] at some point. But as long as the [economic] data remains strong, the market is going to believe in the idea that there is more coming. That tapering is going to be brought forward.”

Juckes added that the market was repricing the euro to account for the perceived change in the ECB’s monetary stance.

He added that with the fair value of the euro estimated at between $1.25 and $1.30, the single currency had further room to rise.

The euro rose 0.7 percent at $1.2284 after hitting a high of almost $1.23, adding to gains made last week.

This has heightened expectations that policymakers were preparing to reduce the stimulus program.

Further, with hopes of a pro-European governing coalition forming in Germany, confidence in the continent is growing.

Credit Agricole said, “We remain bullish on the euro in coming months because we expect that the political risks in the euro zone will finally start abating on a more sustained basis after the March election in Italy. In addition, we expect the ECB to continue to taper its asset purchases and, ultimately, stop expanding its balance sheet.”