Foreign Exchange Rates: Is Currency Market Intervention From China Keeping Euro (EUR) Strong?

Modified: Wednesday, 11 June 2014 09:00 BST - Written by John Cameron

STORY LINK Foreign Exchange Rates: Is Currency Market Intervention From China Keeping Euro (EUR) Strong?

Despite an apparently ailing economy and a debt crisis which refuses to go away, the euro (currency:EUR) resiliently refused to weaken dramatically against the Pound Sterling (currency:GBP) and the US Dollar (currency:USD) during the first half of this year. Indeed, the Pound euro exchange rate (GBP/EUR) was trading at below the 1.2000 threshold as recently as the final week of March.

Even after last week’s announcement from the European Central Bank that it was introducing a raft of policy measures designed to weaken the single currency, thus boosting eurozone exporters and sucking in inflation via rising prices of imports, the wholesale shift out of euro-denominated assets which policymakers were hoping for has failed to materialise.

Yesterday’s session was a point in case, with the Pound euro exchange rate just about managing a break to a fresh range-topping rate of 1.2401 GBP/EUR – 1 solitary pip higher than last week’s high. However, the afternoon session saw GBP EUR reject this new high, sending the pair down to as low as 1.2366 before the London equities close.

One explanation which has been floated in recent days for the single currency’s stubborn refusal to do what investors think it should do and weaken concerns the effect of foreign exchange market interventions from the People’s Bank of China. The Chinese central bank has for some time now been intervening in the global currency markets in an attempt to actively weaken the Yuan (currency:RMB). China’s authorities carry out this aim by using Yuan-denominated to purchase US Dollars. It then sells these Dollars into other currencies in order to spread its risk and maintain a balanced portfolio of reserve currencies and the tender of choice for such onward purchases in recent times has been the euro.

Steven Englander of Citigroup is one advocate of this theory; he stated yesterday that, ‘periods of rising dollar against the Yuan have also been periods of upward pressure on the euro.’The figures certainly back up Englander’s hypothesis – the USD RMB exchange rate climbed by 1.4% during the month of February and during the same timeframe, the EUR USD exchange rate jumped by 2.3%. The future forecast for GBP EUR could therefore be dependent upon future actions by the People’s Bank of China.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Daily Currency Updates Euro Forecasts Euro Pound Forecasts Pound Eu Forecasts