Wall Street Journal
February 24, 2011
Have euro traders lost their minds? What on earth is the common currency doing up at $1.38 against the dollar? It is close to its strongest level since November.
This is weird, and it has market insiders scratching their heads, because periods of geopolitical stress normally lead to euro weakness against the greenback. Fear up, dollar up, euro down. Simple.
So what’s going on now? The market appears to have decided that the Middle East crisis and the potential oil crisis are bad for the dollar. But it’s hard to see it as good news for the euro. And the long-running sovereign debt crisis has not gone away.
It’s mostly down to central bank policies. The market is convinced, with good reason, that the ECB will raise interest rates well before the Fed, which supports the 17-country currency in any case, but particularly since we could all be heading for an inflation-boosting oil price rise. The ECB, in other words, is seen as better placed to deal with an oil shock. Hence the oil-shock-bad-for-dollar trade.
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