Euro hits highest level against dollar since 2011

AP News
Posted: Mar 07, 2014 9:07 AM

LONDON (AP) — The euro has struck its highest level against the dollar for nearly two and a half years in the wake of the European Central Bank's decision not to cut interest rates further.

At one point Friday, the currency, which is used by 18 European Union countries, rose to $1.3917, its highest rate since it touched $1.4170 in October 2011.

The currency backed off after a slightly stronger than anticipated U.S. jobs report for February. The 175,000 increase in payrolls was ahead of the consensus forecast in markets for a rise of about 150,000. As a result, analysts said the U.S. Federal Reserve would likely continue reducing its monetary stimulus, providing a fillip to the dollar.

But analysts think the euro is on course to climb further over the coming days, largely as a result of Thursday's decision by the ECB to not cut interest rates following a run of relatively upbeat economic data across the eurozone.

For weeks, many traders had been predicting that the ECB would cut its key interest rate from the already record low of 0.25 percent to boost the muted economic recovery and prevent deflation, a debilitating bout of falling prices. However, after a rise in surveys of business activity and unexpectedly strong 0.3 percent growth in the final quarter of 2013, the ECB opted against further easing measures.

"As a result the market judged that the prospects of further ECB monetary stimulus this cycle had diminished," said Jane Foley, senior currency strategist at Rabobank international.

Europe's single currency has been steadily rising from around $1.22 since the summer of 2012, when ECB President Mario Draghi said he would do "whatever it takes" to save the euro.

With fewer traders thinking a breakup of the currency union was possible, the euro strengthened even though the eurozone's economy lagged that of the United States.

Some analysts think that an appreciating euro may eventually push the ECB to ease monetary policy. A stronger euro can weigh on inflation, which the ECB is trying to bring back up toward its goal of 2 percent. It is currently at just 0.8 percent.

A rising currency can also make exports more expensive — and therefore less competitive on international markets. That could hurt economic activity and keep unemployment high.

"A spike above the $1.40 level may well force the ECB to act," said Derek Halpenny, an analyst at Bank of Tokyo-Mitsubishi UFJ.