The Euro, in large part due to general dollar weakness, climbed to a new 2009 high of $1.4629 in late European currency trade. One Euro is now worth $1.4598 in early morning New York trading.

Most analysts are pointing to two common catalysts for the latest surge in the Euro against the greenback. The price of oil is once again near its short-term high at $72. The European currencies typically fair better than the dollar when oil is high.

The other reason the Euro is on the move against the dollar is due to general dollar weakness. Most major currencies have experienced strong gains of late against the dollar. A dollar is only worth a little over 90 yen and $1.07 Canadian.

The Euro has gained about three pips in three days, but it has also been on a perpetual upward climb against the dollar since near $1.25 in both February and March. The 21 pip gain for the Euro against the dollar in about six months time is pretty remarkable and emphasizes the overall negative sentiment toward the dollar during that timeframe. It is the same sentiment that has helped keep oil knocking on the door of $75 and helped propel gold back over $1,000.

Commentary Wednesday from Chicago Federal Reserve Bank President Charles Evans suggests that the Fed may soon begin raising its base funds rate. He said the tightening of policy could develop more quickly than it did during the 2004-2006 period when rates were increase consistently and quickly. Evans highlighted less risk of deflation, growing confidence in the economy, and the need to reign in inflation before it gets outside reasonable limits.

As is the case with gold, oil, and other currencies, Euro gains against the dollar would likely be limited by a quick increase in the interest yield for the greenback. While other factors, such as renewed concerns about stability in the US economic situation, could impact the dollar, increased interest yields would certainly be a dollar-positive factor.

Without the presence of a speculation catalyst, currencies that have significant interest rate differentials are often moved based on investors hedging income by borrowing lower rate currencies to buy higher yield currencies. This is what led to major carry trade against the yen for years when the Japanese Central Bank maintained a low to no interest rate policy while most other major countries had higher funds rates.

The price of oil could also help with the direction of Euro-dollar ratio. Most economists continue to say oil is over-priced based on market factors. Many technical traders would also point to the non-stop gains of the last six months as reason for a correction or pullback.

Neil Kokemuller
9:18AM EST
Friday, September 11, 2009

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University. He is also in house stock market commentator at Live Charts UK, where you can find real time charts and share prices.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.