The euro traded slightly lower against the dollar Wednesday, but remains in a tight range ahead of a crucial European Union summit in Brussels. The EU’s immediate task when its leaders open a two-day meeting Thursday is to find ways to strengthen its economic and monetary union and reassure markets, in an attempt to put an end to a crisis sending shock waves through the world’s economy. Investors are not counting on a major breakthrough at the summit even though French President Francois Hollande and German Chancellor Angela Merkel said at a meeting in Paris on Wednesday they must find ways to deepen the integration of Europe.
Mr. Hollande and Ms. Merkel, the leaders of the euro zone’s two largest economies, have diverged on some key issues, in particular Mr. Hollande’s push for mutualization of debt with so-called euro bonds. The low chances of a positive outcome from the EU summit will result in the euro falling to $1.20 in the next few weeks. Meanwhile, the U.S. Federal Reserve’s policies are reaching the point of diminishing returns, so the ability of the Fed to weaken the dollar is also decreasing. The nation’s central bank last week extended Operation Twist Treasury purchases through the end of the year, rather than letting the program expire at mid-year. Traditionally, flooding the system with dollars results in the greenback weakening.
EasyForexNews Research Team