EUR/USD continues to stretch its legs

The trend of strengthening euro and weakening dollar has returned, as once again this currency cross is above the 1.3600 level.

For a while, markets took the view that tapering of the US government’s $85 billion monthly debt-purchasing scheme could well start in 2013. This thinking coincided with the dip in EUR/USD, back down to 1.3300. Subsequently, with dovishly minded FOMC member Janet Yellen confirmed as the Federal Reserve chairwoman-in-waiting and dovish comments from a number of voting members, opinion has generally changed.

The European side of the equation has to a greater or lesser extent been overlooked by the markets, which instead appear preoccupied by the US economic position.

We are now just over a week away from US president Barack Obama tackling the US budget again. The stagnation in the two major US political parties in agreeing a longer-term strategy has been very disappointing, and there have been precious few soundbites from either party to give the markets confidence that anything has changed since the last time they tried to address this issue.

All of this goes some way to explaining the dollar weakness, and points towards further devaluation ahead. This is likely to remain the case until the US looks like a country capable of deciding its longer-term economic policies.

Spot FX EUR/USD chart

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