Reply #18: ECB says euro's surge against dollar is due to diverging growth expectations [View All]

http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=5dfe3f85-49a9-4228-844d-ca77dcb8070a

FRANKFURT (AFX) - The European Central Bank said the euro's recent surge against the dollar is the result of diverging growth expectations for the euro zone and the US.

"Evidence of a moderation in US economic activity, as well as news confirming robust economic growth in the euro area, appears to have influenced market expectations concerning the relative economic outlook for the two economic areas, thereby weighing on the US dollar," the ECB said in its December monthly bulletin. It made no mention of the impact of Chinese comments on possible reserve diversification, which currency traders said was the trigger for the recent dollar sell-off.

But it noted that positive economic data from Japan did not prevent the euro from appreciating against the yen. "Evidence of robust economic activity in Japan...does not appear to have supported the Japanese currency," it said.

The ECB said survey data point to a continuation of robust euro zone growth in the fourth quarter, with consumption growth expected to remain strong. "The medium-term outlook for economic activity remains favourable," it said.

And it cautioned against reading too much into the flattening of the euro zone yield curve and the inversion of the US yield curve. Although an inverted yield curve -- in which short-term interest rates are higher than long-term rates -- has traditionally been seen as a signal that recession lies ahead, low long-term yields are now partly the result of the very low levels of risk premia which investors require for holding securities over longer periods. "Changes in these term premia might sometimes blunt the yield curve's usefulness as a leading indicator," it said. "The term spread corrected for risk premia does not seem to indicate heightened risks of an economic downturn in the euro area," it said.

The ECB also said that producer prices point to renewed inflation pressures ahead in the euro zone.

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"The improvement of the labour market situation could lead to significantly higher than expected wage pressures," it said.

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