The euro was catapulted to two year highs as the European Central Bank (ECB) gets ready for their new acronym AQR, or asset-quality review. As 2013 wraps up, the ECB will be examining the capital positions within eurozone banks to determine which will need new injections of cash.
The euro reached 1.3892 against the dollar before pealing back from the high by 100 pips. “There’s a lot of attention on the AQR, and there’s some positioning ahead of the end of the calendar year,” said John Hardy, FX strategist at Danske Bank. Traders said moves are more substantial because liquidity is thin during the holiday trade.
“Although there’s no fundamental reasons to draw the euro higher, there’s unlikely to be considerable retracement as liquidity comes back because the damage is already done,” said Hidetoshi Honda, FX strategist at Mizuho Corporate Bank. The ECB has not actively expanded their balance sheet (which tends to depreciate the nation’s currency), so the euro sees no limits regardless of whether a higher exchange-rate may be detrimental to the struggling economy.
In a separate note, ECB board member Bubba Weidmann said that the ECB must raise interest rates if inflation pressure mounts. Eurozone inflation is under one percent, but traders and algorithms jump in “raise” and “rate” and it is off to the races.