The U.S. dollar has been one of the worst-performing developed market currencies this year, which has been good news for the euro and the CurrencyShares Euro Currency Trust (NYSEArca: FXE).
FXE climbed 4.5% in the first quarter and is now higher by 4.7% year-to-date. That is an impressive showing for the once embattled common currency. Coming into this year, some market observers predicted the euro would not weaken against the U.S. dollar as much as was seen in the previous two years. The U.S. dollar has previously been strengthening on the prospect of a tighter monetary policy, which would help remove some of the excess liquidity sloshing around in the economy.
However, the euro and FXE could be poised to take breathers as some familiar problems come back into the picture. And the euro’s potential retreat is likely to have little to do with the European Central Bank (ECB).
ECB President Mario Draghi has previously signaled that the ECB could expand its quantitative-easing program to bolster growth and bring inflation back up, stating that the return of inflation to target is more important than the impact of ultra-low rates.
“The European Central Bank continued an aggressive stimulus policy during their meeting on March 10. The ECB is using negative interest rates of -.04% as well as an increased program of bond buying for quantitative easing, increasing to 80 billion Euros per month. The ECB also drastically cut their inflation forecast for 2016 to 0.1% from 1.0%. Eurozone growth is predicted to be a weak 1.4% for 2016, 1.7% for 2017, and 1.9% for 2018. The ECB decided against implementing a tiered deposit rate. The Bank of Japan implemented such a program in January,” according to OptionsExpress.