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Forex News – Quarterly review: US dollar, yen post strong gains as euro lags in Q1

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The first quarter was noticeable for some very sharp currency moves, as the US dollar posted significant gains and the euro crashed.  Many pundits rapidly revised their euro / dollar forecasts lower to eye parity and beyond.  The focus was on the ECB’s plan to buy government bonds, while the Fed was preparing to raise interest rates.

The depreciating euro was the weakest major currency in the first quarter of 2015 as it lost around 11% of its value against the dollar and yen.  The European currency had already started the year on a weak note due to expectations that the European Central Bank would launch a quantitative easing program as the threat of deflation was increasing, and following the announcement on January 22 that the ECB would start buying 60 billion euros worth of Eurozone bonds per month until September 2016.  Following the QE announcement and confounding expectations that QE had already been discounted by the market, the euro came under further pressure and weakened across the board.  The euro started the quarter at 1.2048 against the dollar and at 145.08 against the yen.  It closed the quarter with massive losses at 1.07309 US dollars and 128.875 yen, having hit lows of 1.0469 and 127.03 against the dollar and yen respectively on March 15.

The dollar strengthened against most major currencies, including the UK pound and Australian dollar. However, against the yen, it was literally unchanged over the quarter. The dollar’s strength was driven by expectations that the Federal Reserve would increase interest rates later in the year. However, the exact timing of the increase caused some volatility during the quarter, particularly on March 18 when in her FOMC statement, the Fed Chair Janet Yellen removed the word ‘patient’ regarding the guidance on when the Fed expects to raise rates. The hawkish statement was balanced by some more downbeat expectations of employment, growth and on the negative impact of the stronger dollar on exports, which took the markets by surprise.

The currency market’s ‘unsung hero’ during the first quarter was the Japanese yen.  The yen resisted attempts by the US dollar to drive dollar / yen higher, although the December’s 7 ½ -year high of 121.80 was briefly violated by climbing above 122.  The pair subsequently came back below 120.  After a terrible final quarter of 2014, during which it posted sizeable losses, the yen stabilized as the lack of fresh bad news or new stimulus by the Bank of Japan combined with excessive bearish positioning against the currency to keep the yen stable against the dollar but gaining against most other majors.

The pound was weak but nowhere as weak as the euro as it was helped by expectations that the Bank of England will hike UK rates next year.  The UK economy was posting solid economic growth, unemployment was falling in the country but inflation was too low for the Bank of England to be thinking about raising rates too quickly.  Political uncertainty in the form of the May General Election also weighed on the pound, as the new election could see far-right, anti-EU parties strengthen as well as lead to a dangerous referendum on UK membership of the European Union.  The pound was down almost 5% against the US dollar, but it was up by 6% against the euro as it drove euro / pound to a 7-year low.

The Australian dollar posted a significant loss, as the Reserve Bank of Australia surprised markets by cutting its benchmark interest rate by 0.25% to 2.25% on February 3rd and as the price of iron ore, Australia’s key export commodity, plunged further on international markets.

Last but not least, the Swiss franc, curtesy of the Swiss National Bank’s abandonment of the ‘Franc Cap’ on January 15, was the best performing currency of the first quarter.  Pent-up demand to buy the franc resulted in a rapid depreciation of the Swiss currency when it was floated, pushing it even below the 0.90 mark from the 1.20 euro / franc rate that the SNB had previously vowed to protect.  There was volatile trading in Swiss franc pairs subsequently, which eventually led to a drop in the franc but still much stronger than before the cap was lifted.

Looking ahead to the second quarter, the main theme is expected to remain that of monetary policy divergences, although some pairs like euro / dollar could also see some violent counter-trend moves due to excessive positioning.

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