Sharp rise in euro weighs on equities

The euro has risen sharply over the past month and in early August reached its highest level against the US dollar since early 2015. Strikingly, the rise has occurred against a backdrop of broadly unchanged expectations for interest rates between the US and the euro-zone. (See Chart.) The move might instead reflect changes in expectations for unconventional monetary policy, with the ECB expected to announce a tapering of its asset purchases in the coming months. The stronger euro, which will reduce firms’ overseas earnings in local currency terms, has weighed on equity prices. However, equities remain high by recent standards, reflecting the increasingly broad-based nature of the region’s economic recovery.