The euro and pound are being hurried along by a conveyor belt of interest rate hikes in Europe just as U.S. rates near a peak. This is a reversal of the trends that drove them to multi-decade lows last year. The euro and pound have rallied 4-5% against the dollar since March as market ructions triggered by banking stress die down and signs of resilience in Europe's economies draw investors back.
The euro , which traded below $1 in September, a two-decade low, is now worth around $1.10, close to its highest in more than a year. Sterling has rallied 20% from record lows hit in September to trade near 10-month highs above $1.24. Europe's other major currency, the Swiss franc, is also near its strongest in over two years .
Data this week showed British wages and inflation both rose faster than anticipated last month, with inflation over 10% - the highest in western Europe. As a result, Morgan Stanley analysts now expect a 25 basis point rate hike from the Bank of England in May, and see "clear risks of a June move too".
State Street's Graf said historically it is changing rate differentials that particularly affect currencies, not just the outright yield level.
The Federal Reserve's relentless rate hikes sent the dollar to 20-year highs last year as other big central banks moved more slowly. The U.S. currency was further boosted by demand for safe-haven assets following Russia's shock invasion of Ukraine, fears about economic growth, particularly in Europe, and high costs for energy, which is priced in dollars.
Source: reuters.com