The euro is holding above the key $1.5000 level Wednesday afternoon, and stocks and crude oil are also up, amid increased signals that the economic recovery is taking hold, even in those countries worst hit by the credit crisis.
The latest sign to capture markets' attention came from the Bank of England's minutes of its early October meeting. The more upbeat tone of the release and the unanimous vote to hold the asset-purchase program at $175 billion implied that level would mark the ceiling, dashing expectations for a further extension.
Another round of better-than-expected earnings in the U.S., led by Morgan Stanley, Wells Fargo and Yahoo, buoyed the stock market, with crude oil's rise above $80 adding to energy companies gains.
With investors focused on the global recovery, the euro rose as high as $1.5040 by early afternoon. That's up from $1.4929 late Tuesday in New York, and the highest it has been since Aug. 11 2008.
Investors "are more willing to take a riskier trade in an environment where they are more content that economic fundamentals are improving," said Jessica Hoversen, fixed-income and foreign-exchange analyst at MF Global in Chicago. As global financial conditions improve, investors are more willing to abandon the safe-haven dollar and bet on riskier assets, she said.
The Dow Jones Industrial Average was recently up 41 points, as crude oil futures were up $2.45 at 81.57. Treasurys were lower across the board, with the benchmark 10-year note down 17/32 for a yield of 3.40%, up 6.5 basis points on the day. Bond yields rise when prices fall.
The Dollar Index, a trade-weighted basket of six currencies, fell to its lowest level since August 2008, and was at 75.976, from 75.540 late Tuesday. Sterling hit a one-month high of $1.6615.
There have been increased signs recently that central banks and governments in many parts of the world see the recovery taking hold and are signalling a gradual end to the massive policy easing put in place to combat the credit crunch and a deep global recession.
Australia launched the first salvo, hiking rates to 3.25% and highlighting inflation concerns. Other banks have followed suit, with the Reserve Bank of New Zealand overnight warning that rates may have to rise to damp house price gains.
The Federal Reserve, however, has shown little indication that it is anywhere close to removing the massive amounts of liquidity it has pumped into the system. Late Tuesday, San Francisco Federal Reserve President Janet Yellen said she doesn't expect the central bank to tighten monetary policy in the next few months.
That implies a weak dollar, even as most central banks in the developed world, outside of Australia and New Zealand, will likely keep monetary conditions loose and interest rates low for a while to come.
For global policy makers the dollar's persistent weakness poses a challenge: many countries fear that strong domestic currencies could harm still fragile recoveries. Export-dependent Asian countries have been intervening to keep their currencies from appreciating too rapidly, while the Brazilian government introduced a 2% tax on foreign investments into the country's stock and bond markets to curb real strength.
The Bank of Canada, meanwhile, warned that Canadian dollar strength could jeopardize all the positive developments in the domestic recovery.
For now, the global rebalancing--which requires the U.S. to save more and consume less and countries running surpluses to consume more and save less -- is playing out mainly via the euro-dollar exchange rate, which could jeopardize that area's recovery.
"The most obvious losers from a euro trading at $1.50 will be major euro-zone exporters to the U.S. and to countries whose currencies are linked to the dollar as they will obviously find their competitiveness impaired," said Howard Archer, chief U.K. and European economist at IHS Global Insight in London. "This is at a time when global economic activity and trade is still fragile, with relapses a serious risk."
