Week in FX Europe – Dollar Perception Has the EUR Appreciating

When the Fed gets to add liquidity via QE, it expands it’s own balance sheet in relation to that of the ECB’s, hence the spread between the two entities grows. Historically, the dollar begins to slide. When the ECB does it, the spread narrows and the EUR is now on that slippery slope.

Confidence in the European banking system has also been boosted in recent weeks, as some European banks agree to payback their three-year LTRO loans two-year’s early to the ECB. This will help to reduce the debt on the central banks balance sheet and give the EUR a boost.

This balance sheet scenario suggests that the EUR would appreciate outright; at least until investors perceive that the Fed will stop expanding its own balance sheet.

Next week the ECB is expected to keep rates on hold at its February meeting. The EUR’s value could be putting Draghi in a position to suggest that some central bank measures may be required over the coming months.

• PM Cameron’s Plan Upsets Latvia’s Euro Thoughts
• Deutsche Bank reports $3B Loss from cost of job cuts
• ECB balance sheet at lowest level in nearly a year: DJ
• Fitch Warns UK is at Significant Risk of a Downgrade
• Greek Debt Rally Loses Steam as Fears Return
• UK Pension Experts Criticize QE
• Spanish Christmas Retail Sales Fall 10 percent

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