The euro was moderately higher across the board in European trading hours Friday as data showed German business confidence climbing to a record high, offsetting the negative impact of a five-notch downgrade of Ireland’s credit rating.
The 16-country currency was up against the dollar, yen and pound after Munich-based research institute Ifo said its business climate index rose to 109.9 from 109.3 in November–the highest level since Germany’s reunification.
The strong reading helped the euro recover from hitting a fresh all-time low against the Swiss franc and a four-year low against the Swedish krona earlier in the session, after Moody’s Investors Service Inc. downgraded Irish sovereign debt to Baa1 from Aa2.
Prior to that in Asian trading the euro was supported by news that European Union leaders had reached an agreement late Thursday on the treaty changes required to establish a “permanent crisis mechanism” in 2013.
“The euro’s getting a little bit of comfort today from the EU summit and the German data but as the downgrades highlight, the problems still exist,” said Ian Stannard, a currency analyst at BNP Paribas in London.
The treaty changes agreed, while being a step forward and providing support for the euro, are light on details, said Sara Yates, a currency analyst at Barclays Capital in London.
“The council update is a powerful reminder that without additional severe market pressure, the European decision makers are not willing to act,” said Citigroup economist Juergen Michels.
That leaves the euro looking vulnerable going forward, market participants said.
“Unless there is recognition that the euro’s problems are structural [as opposed to stemming from the failings of the periphery], this bounce can’t go far and it is only a matter of time before the euro goes down again,” said Kit Juckes, head of foreign exchange at Societe Generale in a note to clients.
Market participants are likely to continue watching developments from the European summit which concludes later Friday in Brussels.
Elsewhere, the dollar was under pressure against the yen after the U.S. House of Representatives agreed to a two-year extension of tax cuts for individuals and businesses.
Meanwhile, the greenback was steady against the commodity-linked Canadian and Australian dollars.
In Europe’s emerging markets, the Turkish lira was steady against the dollar after the country’s central bank cut its benchmark interest rate late Thursday in an effort to curb an influx of speculative investment.
“Although the rate is expected to fall over the coming months, the new course taken by the central bank can be considered to be high-risk, especially if the measures do not work in curbing liquidity,” said emerging market strategists at Commerzbank in a note to clients. “Under any circumstances that is bad news for the lira,” the strategists added.
