Euro Surges to Three-Month High as Dollar Sells Off Amid Treasury Yield Collapse
The EUR/USD currency pair has reached a three-month high of 1.1711 after trading at 1.1684, up 0.05% from Wednesday's close. This move is significant as it marks a fresh high in the euro's value against the US dollar.
The catalyst for this movement was not European, but rather a collapse in long-dated Treasury yields on Wednesday. The Treasury announced that it would double the size of its longer-dated debt repurchases, which led to a sell-off in the dollar and a spike in the euro's value.
Underlying this movement is a policy reversal, with the European Central Bank (ECB) increasingly likely to raise interest rates. Market pricing assigns roughly 84% probability to a 25 basis point hike on September 10, taking the deposit rate from 2.25% to 2.50%. This would be the first increase since June and marks a significant shift in policy.
The Federal Reserve, on the other hand, is less likely to raise rates, with a 69.9% probability of holding at 3.50% to 3.75% in September. The minutes from the Fed's July meeting showed that officials were prepared to raise rates, but this was largely seen as stale news and did not lead to a rally in the dollar.
The policy gap between the ECB and the Fed is compressing, with the ECB tightening rather than easing. This structural change has led market participants to target 1.1800 for the EUR/USD pair.