The euro hit its lowest level against the dollar in more than a decade yesterday as markets reacted to the Federal Reserve’s suggestion that it might increase rates more than expected next year.
As the euro dropped to $1.036, its lowest level since January 2003, traders said it could reach parity with the dollar before the end of the year.
Although Wednesday’s 0.25 per cent increase in US interest rates was priced into exchange rates in advance, guidance from Janet Yellen, the Fed chairwoman, that three more increases might follow in 2017 surprised markets and sent the dollar higher against the euro.
Against a basket of six major currencies the dollar jumped as much as 1.5 per cent to a roughly 14-year high of 103.32.
Analysts said it was also gaining on expectations that the incoming Trump administration’s economic plans would complement the Fed’s pace of rate increases and boost the dollar further.
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“There is an expectation that there is going to be a strong economy next year,” Douglas Borthwick, of Chapdelaine Foreign Exchange, said.
By contrast, the European Central Bank warned last week of continued uncertainty as it pledged a further €540 billion of stimulus for the eurozone and left interest rates unchanged.
Paresh Davdra, chief executive of RationalFX, said fears that France could pull out of the euro were also undermining the currency. He added that the pound had taken a backseat to the euro on currency markets. Although sterling fell 0.28 per cent against the US dollar yesterday to 1.24, the pound remains above its post-Brexit lows.
