Euro Exchange Rate News Views and Insights

• March 2012: The end of February saw the ECB expand its balance sheet through the LTRO operation. This has helped risk going into March. This is a positive for the euro exchange rate is it not?
  
  No wait ! Things have changed. The first LTRO boosted risk and boosted demand for the euro. Notice that when the US Fed and the Bank of England do the same thing the US dollar and pound both weaken. Well, it looks like this same dynamic will finally catch up with the euro. Barclays Capital explain:
  
  "The LTRO does constitute an easing of monetary conditions as net new borrowing (headline EUR529bn minus rolled debt) is EUR313bn.
  
  "Subtracting the EUR28bn from the fall in today's 3m USD borrowing, this equates to an 11% increase in the ECB balance sheet. This compares with a EUR190bn increase in late December (or a balance sheet increase of roughly 8%).
  
  "The ECB balance sheet now amounts to 32% of euro area GDP, compared with 21% in the UK, 19% in the US and 30% in Japan. A weaker EUR vs. the majors is therefore even more likely now and remains one of our core views."

• January 2012: The euro continues to find weakness as the Eurozone debt crisis continues to evolve. The close of 2011 saw European asset repatriations start to end, hence demand for the euro also fell; thus euro exchange rates weakened.

With regards to interest rates, the first two months of 2012 could see the ECB cut rates to as low as 0.5% - this is broadly a euro exchange rate negative as any interest rate backing the currency enjoyed in 2011 will now be eroded.

This is what some of the key research institutions are saying about the euro exchange rate going into 2012:

• Bank of America Merrill Lynch: Bank of America say that the euro is likely to suffer going into 2012 as the focus on the currency markets shifts to economic performance as opposed to pure risk-on / risk-off trading. "The correlation between strong data and the US dollar (USD) has flipped, where now positive US data surprises are good for the USD given European concerns," says BofA. The same relationship will therefore exist between the euro and eurozone data.

• Barclays Capital: BarCap shares the view of Bank of America saying euro exchange rates will suffer on a weakening growth outlook in the euro area would be EUR negative as it leads to tighter financial conditions (therefore higher currency risk premia) and the prospect of easier monetary policy in the euro area.

• UBS: Record demand for UK gilts in the final months of 2011 confirmed the asset as a safe-haven option. The purchase of these gilts has supported the pound sterling, particularly against the euro making sterling a safe haven play. This will likely further pressure the pound to euro exchange rate.

• The euro is the currency of the 17 member Eurozone:

• Members: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. In addition the following smaller non-Eurozone countries use the euro: Montenegro, Andorra, Monaco, San Marino and Vatican City.

• The Euro Dollar exchange rate is the worlds most traded currency pair.

• The euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar.