Currency briefing: German coalition pushes euro

on Nov 28, 2013
Updated: Oct 21, 2019

The euro increased to a four-year high against the yen after the German consumer climate rose to a six-year high of 7.4 from 7.1 in the prior month and as Chancellor Angela Merkel reached a deal to form a coalition government with the Social Democrats. Politicians in Germany reached an accord on wages and spending increases without raising taxes, spurring demand for the region’s assets. As the long coalition talks finally ended, optimism over the German economy spread across markets.

The dollar extended its gains against the yen after jobless claims unexpectedly declined to the lowest level in two months and Bank of Japan board member, Syuri Shirai, raised doubts as to whether the bank’s two per cent inflation target can be achieved by 2015 due to downside risks on growth and the possibility of deflationary pressures returning.

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“Germany finally has a government – it wasn’t something that was bothering the market, but that’s something good on the background,” said Simon Smith, chief economist at FxPro Group Ltd. in London. “People have been relatively bullish on the euro lately. It has decent current account position and low inflation. The bigger picture will be supportive for the currency.”

The slide in the yen reached new extremes yesterday as the currency, hit by rising expectations that the Bank of Japan will have to take additional easing measures, collapsed to a six-month low against the dollar and multiyear lows against the euro, pound and Swiss franc.

“As the market begins to consider the possibility of a Fed taper in December…and further BoJ action likely in 2014, we feel that the current move could be the beginning of the next step change,” a foreign-exchange strategist commented.
Today, Germany is to produce preliminary data on consumer inflation (13:00UTC), in addition to data on the change in the number of people unemployed and the unemployment rate in November (08:55UTC). Elsewhere, the BoE’s Governor Carney is due to speak and the Financial Stability Report will be released, both at 10:30UTC.
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