Euro-Dollar Needs Help from Friends to Keep Rising
- Written by: Gary Howes
Image © Adobe Images
How high will the euro rise against the dollar? The answer depends on what the pound, yen and yuan do.
This is according to Société Générale, where currency analysts point out that "potential upside in EUR/USD will be limited if other currencies do not also make gains against the USD."
The observation is an important reminder that cross-currency currents are a critical driver in FX moves and often one currency is flattered by what its peers are doing.
Image courtesy of Societe Generale.
Kit Juckes, chief FX analyst at Société Générale, explains:
"The EU, US, China, UK and Japan account for over half of world trade. Since the start of February, the EUR has gained 12% against the USD, 11% against the JPY, 9% against the CNY and 5% against the GBP.
"The result of the euro rising on its own in recent months, can be seen in trade-weighted currency indices. The euro’s trade-weighted value today is almost 8% higher than it was at the end of 2020, when EUR/USD was above 1.23.
"Indeed, in real effective terms, it is at its highest level since 2014. That means that the potential upside in EUR/USD will be limited if other currencies do not also make gains against the USD."
When we talk about exchange rates, it’s easy to think of them in isolation, like EUR/USD moving up or down.
But in reality, cross-currency developments matter just as much, because currencies trade in a network, not in isolated pairs.
What Juckes is saying is that if the euro keeps rising against everyone else while the dollar holds steady, there’s less room for EUR/USD to climb further.
For EUR/USD to break significantly higher, other major currencies, like the yen, sterling, or yuan, would also need to gain ground against the dollar.
If the euro is already stretching higher against most peers, its ability to extend gains against the dollar gets limited unless those peers join the move.
