Italy's Euro Party Not Universal as Ferrari, Campari Rejoice

As some of Italy’s best-known brands from Ferrari to Campari toast the weaker euro, many in the currency region’s third-biggest economy have little to celebrate so far.

The euro’s drop below $ 1.10 is favoring companies focused on markets outside the 19-nation bloc. But with more than 40 percent of the nation’s exports going to other euro countries, the benefit is eluding many in the recession-hit economy.

“The weaker euro doesn’t mean much for us,” said Tiziano Paciti, a partner at marble-work manufacturer Marmi Regina Srl, based near Verona in the north of the country. “Our main clients are in France and Germany, and our suppliers outside the region have always paid in euros and I see no reason why they should change now.”

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With the European Central Bank pumping in stimulus to help the euro area, President Mario Draghi has touted the resulting weaker currency as a boost for the region’s economy. In Italy, the government has cited the currency’s plunge among the top favorable conditions that will help the country emerge from a record-long recession that began more than three years ago.

The euro has plunged about 11 percent against the dollar this year and is the worst performer among a basket of peers measured by Bloomberg Correlation-Weighted Indexes. It was trading at $ 1.08 Wednesday after falling below $ 1.05 last month.

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Jeep Renegade

While Paciti’s remarks reflect the view of thousands of small firms in Italy, the country’s most famous business leaders see things differently. Fiat Chrysler Automobiles NV Chief Executive Officer Sergio Marchionne said last month that the cheaper euro will help sales of Jeep Renegade, the first Jeep model exclusively built outside North America.

For Ferrari, controlled by Fiat, the weaker exchange rate also means a profit-margin boost on U.S. sales. Its high-end sports cars are all built at its plant in Maranello near Modena.

“This is a favorable time for Italy,” said Brunello Cucinelli, chief executive officer of his namesake company, known for its linen and silk sweaters. “The weaker euro will support our exports,” he said on March 10, commenting on both the company and the country’s economy.

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Among those celebrating the latest currency-market developments was Milan-based drinks maker Davide Campari-Milano S.p.A. Starting in the fourth quarter of 2014, what it said was a “very unfavorable” currency impact last year was partially unwound, according to its full-year results.

Most of the luxury-goods companies whose exports benefit from the lower euro “manufacture at home, costs are kept low,” Bloomberg Intelligence analyst Deborah Aitken said in a March 24 report. “With strong gross profits, export prices do not have to be raised, making them more competitive.”

No Control

Italian exports to countries outside euro region totaled 238 billion euros in 2014, up 1.5 percent from the previous year.

Data for 2015 have so far been mixed. Sales of goods and services outside the bloc declined 2.4 percent in January from a year earlier, Istat said last month. While comparable data for February won’t be available until April 16, preliminary figures show that exports outside the entire European Union rose an annual 7.1 percent that month. The statistics office will publish February industrial production data on April 13.

“I really don’t understand why the euro exchange rate should be a good news,” Giuseppe Zanotti, founder and owner of shoemaker Giuseppe Zanotti Design, said in a March 17 interview.

“It’s something that we can’t control anyway,” said Zanotti, whose customers include Madonna and Beyonce. “A weaker or stronger euro won’t change the things. A stronger or weaker idea will do that.”

Short Lived

Ultimately, even those benefiting from the weaker euro may find the boon is short-lived, with analysts and economists at Italy’s largest bank forecasting a reversal for the currency.

“The euro may have bottomed out,” Vasileios Gkionakis, UniCredit’s London-based head of global foreign-exchange strategy, said in a note on March 25. UniCredit estimates a long-term euro-dollar fair value at about $ 1.20 and says it’s hard to justify an even short-term fair value below $ 1.15.

For Alberto Bagnai, who teaches economics at Gabriele d’Annunzio University in Pescara, the currency fluctuations don’t change the ease or difficulties related to Italy’s main export destination.

In a study published in August, he estimated the impact of the currency’s depreciation “to be almost zero or negative in the first three to four years.”

“A depreciation of the euro leaves unaffected the price competitiveness of Italian goods in Italy’s largest market, the euro region,” said Bagnai, author of two books advocating the dismantling of the monetary union. “The increase in exports towards U.S., Japan, and the emerging countries will be offset by an increase in imports from the euro zone.”

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Currencies: Euro trims losses after U.S. job-openings report

NEW YORK (MarketWatch) — The euro trimmed its earlier losses Tuesday after the Department of Labor said U.S. job openings rose to a 14-year high in February.

The euro EURUSD, -0.58%  was at $ 1.0875, compared with $ 1.0937 Monday evening, trimming its earlier losses after the Labor Department showed that job openings rose to 5.13 million in February from 4.97 million in January. The dollar was little-changed against its other rivals after the report.

The euro had moved lower against the dollar early Tuesday as traders in Europe returned to their desks after a four-day weekend that included market holidays on Friday and Monday.

The euro had surged against the dollar Friday after the U.S. Labor Department reported the weakest rate of jobs growth in 15 months, and it continued to trade above $ 1.09 during Monday’s session.

But swings in the euro-dollar exchange rate were likely exaggerated over the last two sessions amid thin trading volume, analysts said. That said, thin volumes don’t always affect currency price moves, according to RBC Capital Markets.

“We’re seeing liquidity return and prices start to normalize,” said John Doyle, director of markets at Tempus Inc.

Currency traders appeared to shrug off data showing the eurozone economy grew at its fastest pace in 11 months in March.

Earlier in the global day, the Reserve Bank of Australia defied the market’s expectations and left its cash target rate, its benchmark interest rate, unchanged, sending the Australian dollar to its highest level against the buck in eight days.

The aussie AUDUSD, +0.74%  hit a session-high of 77.13 cents, before falling to 76.55 cents in recent trade. It traded at 75.99 cents Monday evening.

Financial markets had been pricing in a 75% chance the benchmark interest rate would be trimmed by 0.25 percentage point to a record-low 2.0%.

Read: Australia keeps interest rates steady at 2.25%

In other Asia trade USDJPY, +0.70%  rose to ¥120.17, compared with ¥119.48 late Monday in North America.

Boris Schlossberg, managing director of FX strategy at BK Asset Management, said that rising Treasury yields are attracting foreign flows to the U.S. dollar.

“In North America today the calendar is nearly barren so price action will likely be driven by equity and fixed income markets,” Schlossberg said in a note to clients.

The ICE U.S. Dollar Index DXY, +0.55% a measure of the dollar’s strength against a basket of six rivals, was up 0.7% to 97.4360.

Euro Rises Fourth Day as Greek Officials Promise IMF Payment

The euro advanced for a fourth day after Greece pledged to make a payment to the International Monetary Fund this week.

The shared currency climbed versus most of its major counterparts after Greece’s Finance Minister Yanis Varoufakis reiterated that the country will make the payment of about 450 million euros ($ 494 million) due April 9. The dollar slumped as Federal Reserve Bank of New York President William C. Dudley said the pace of interest-rate increases is likely to be “shallow” once the central bank starts tightening.

“We’ve had Greek headlines for three months now and I think it’s contributed to intraday volatility,” Vassili Serebriakov, a New York-based foreign-exchange strategist at BNP Paribas SA, said in a phone interview. “The most interesting question for me this session is whether the euro can hold above $ 1.10. This is a level where we’ve failed repeatedly and, in our view, it suggests an underlying demand from European investors to sell the euro.”

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The euro advanced 0.5 percent to $ 1.1025 at 9:20 a.m. in New York, extending its longest streak of gains in 11 months.

The common currency rose 0.5 percent to 131.156 yen. The yen was little changed at 118.96 per dollar, while the Bloomberg Dollar Spot Index dropped 0.3 percent to 1,179.24.

Global Talks

Greece and euro-area authorities are in negotiations about a package of measures proposed by the government to repair its economy, a condition for the release of bailout funds.

Varoufakis met IMF Managing Director Christine Lagarde in Washington and is scheduled to meet U.S. officials on Monday. “The country will pay the IMF on April 9,” Greece’s Alternate Finance Minister Dimitris Mardas said in an interview on Mega TV on April 4.

“The market’s pretty much siding with the view that Greece will make that payment,” said Prashant Newnaha, a rates strategist at TD Securities Inc. in Singapore. “If they do make that payment, that’s also going to be a positive for the euro.”

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The euro has tumbled 5.5 percent this year, the worse performer among a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has gained 4.9 percent and the yen advanced 5.7 percent in the period, the indexes show.

Net bearish positions on the euro rose to 226,560 contracts in the week to March 31, the most since the currency’s inception, according to data from the Washington-based Commodity Futures Trading Commission.

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The common currency has slumped amid unprecedented easing from the European Central Bank as the U.S. moves toward raising borrowing costs for the first time since 2006.

The timing of interest-rate increases is still uncertain and will depend on data, New York Fed President Dudley said in a speech Monday in Newark, New Jersey. Jobs data trailed forecasts on April 3, casting doubt on the strength of the U.S. recovery.

“It will be important to monitor developments to determine whether the softness in the March labor market report evident on Friday foreshadows a more substantial slowing in the labor market than I currently anticipate,” he said.

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German chambers of commerce fear weak euro could have negative effects

BERLIN (Reuters) – Germany’s DIHK Chambers of Commerce said on Thursday that while the weak euro would initially boost Europe’s largest economy by enabling exporters to offer their goods abroad for less, firms were increasingly concerned about the exchange rate.

“The strong exchange rate fluctuations in recent months are making it difficult to develop long-term plans and increasing the cost of the hedging transactions they need to do,” the DIHK said.

Most firms in Germany have to import goods and these have become noticeably more expensive due to the weak euro, the DIHK said.

A DIHK survey published in February found that almost a fifth of German companies see the weak euro as a business risk, compared with 11 percent of firms in a poll published in October, the DIHK said.

While firms now pay around a third less for oil than they did six months ago, the weak euro exchange rate is counteracting some of those gains given that oil is priced in U.S. dollars, the DIHK said.

“A weak exchange rate should not create the impression of greater competitiveness. A weak currency generally goes with a weaker economy,” the DIHK said.

“The devaluation of the euro is therefore also a sign that investors have more confidence in other countries’ dynamism, especially in the United States.”

The DIHK also said there was a risk of competitive devaluation after several central banks around the world reduced their key interest rates and so stopped their currencies from appreciating more strongly.

“That shows that competitive devaluation that seeks to boost your own export industry doesn’t achieve anything because other countries can always follow suit,” the DIHK said.

“On the contrary: in such competitions to get the weakest currency everybody loses out in the end.”

(Reporting by Michelle Martin; Editing by Susan Fenton)

Euro Debate Ignites in East EU in Face of Public Skepticism

While Greece may have one foot out the door, policy makers in the European Union’s east are reopening the debate about whether to join the euro area after years of shunning the currency during the global financial crisis.

In the Czech Republic, the prime minister said on Wednesday that joining the euro soon would help the economy after the president challenged the central bank’s long-standing resistance with a vow to appoint policy makers who favor the common currency. In Poland, the main divide between the top two candidates in the May 10 presidential election is whether the region’s biggest economy should ditch the zloty.

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“It’s quite interesting how the sentiment has shifted — I’m slightly surprised by this,” William Jackson, London-based senior economist at Capital Economics Ltd., said by phone on Wednesday. “As the story coming from the euro zone in recent years has been negative, it’s very hard to imagine how the euro case for the public would be made now.”

The obstacles are many. Romania, which has set 2019 as a potential target date, and Hungary don’t meet all the economic criteria. Poland faces legal hurdles and the Czech government has said it won’t set a date during its four-year term. As a standoff between Greece and euro-area leaders threatens to push the country into insolvency and potential exit, opinion polls show most Czechs and Poles oppose a switch.

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Euro Concerns

The appeal of the euro, which all European Union members save Britain and Denmark are technically obliged to join, suffered when the area had to provide emergency loans to ailing members during the economic crisis. While five ex-communist countries that joined the trading bloc in 2004 — Slovakia, Slovenia, Estonia, Latvia, and Lithuania — have acceded, the Czech Republic, Poland and Hungary don’t have road maps.

The region’s three biggest economies argued that floating currencies and control over monetary policy helps shield themselves against shocks like the euro crisis even if smaller countries may benefit from lower exchange-rate volatility and reduced trade costs. Facing weakening in their korunas, zlotys, and forints, some politicians in eastern Europe are questioning that logic.

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Confronting ‘Bogeyman’

The debate in the Czech Republic began again in earnest in February, when President Milos Zeman said he was “very embarrassed” that Slovakia beat the Czechs into the currency. Prime Minister Bohuslav Sobotka voiced support for “the earliest possible target date,” in an interview on Wednesday, even as his main ruling partner, the ANO party of billionaire Finance Minister Andrej Babis, isn’t ready to set a timetable.

“Even though many here don’t hesitate to present the euro as a bogeyman, at closer look we’re talking about a normal and comfortable tool to seek social prosperity,” Sobotka said in an e-mailed response to Bloomberg questions on Wednesday.

In Poland, opposition presidential candidate Andrzej Duda is trying to unseat incumbent Bronislaw Komorowski with the slogan “Yes to Europe, No to the Euro.” He has accused the president of trying to ruin Polish families by adopting a currency that will drive up prices.

Poland should enter the euro area only after “very precise analysis” and only when it benefits the country and ordinary Poles, Prime Minister Ewa Kopacz said late Wednesday. She said Duda’s campaign was misleading because it characterized the government as pushing for adoption.

While the campaign has drawn a statement from Komorowski that Poland may have to hold a referendum on adoption, data indicate that, at least since the economic crisis, the euro may actually aid new members rather than impoverish them.

Euro Gains

Since 2008, the Czech koruna has weakened 13 percent against the euro and the Polish zloty, the Hungarian forint and Romanian leu have lost more than 20 percent. That has made those nations’ exports more competitive and helped drive growth and deter inflation.

But Slovaks, Slovenes and others with wallets stuffed with the common currency have seen their earning power remain steady. Slovakia is also borrowing at negative yields, earning 0.03 percent for five year debt, compared with the Czech yields of positive 0.02 percent.

The stability of the currency is also attractive to companies such as Skoda Auto AS, whose supply chain is closely tied to its owner Volkswagen AG, and utility CEZ AS, the largest publicly traded company in the region.

“The Czech economy is very closely tied to the euro area, especially Germany,” CEZ Chief Financial Officer Martin Novak said last month. “Adopting the euro would make many companies’ lives easier.”

Opposition Obstacle

Some countries don’t have the luxury of debate. In Croatia, the economic crisis has pushed back the timeline for entry. And even though Bulgaria’s finance minister said in January that there’s political consensus to join as soon as possible, according to a report from newspaper 24 Chasa, President Rosen Plevneliev said last month he sees entry into the currency-stability test mechanism in 2018.

Romania, the EU’s second-poorest country, needs to catch up economically to benefit from the euro, central bank Deputy Governor Bogdan Olteanu said on Thursday.

“We’ll have to increase the GDP per capita by at least 10 percent in order to be reasonably competitive inside the union,” he said.

For the bigger economies, public opinion remains an obstacle, with 76 percent of Czechs opposing euro adoption, versus 16 percent who support it, according to a survey of 1,027 people taken a year ago by pollster CVVM.

In Poland, where a constitutional amendment would be needed to give the ECB the power to conduct monetary policy and issue currency, 68 percent oppose a switch, according to an October 2014 survey by pollster CBOS.

“The issue is definitely heating up in CEE. Poland is relatively better positioned for this,” Mai Doan, a London-based economist at Bank of America Corp., said by e-mail on Wednesday. “The Czech population remains very euro-skeptic, while Romania likely still has work to do in terms of real convergence.”

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European manufacturers getting more positive amid lower euro

LONDON (AP) — Enjoying the bonus offered by the much lower euro, manufacturers across much of the 19-country eurozone are hiring again. Greece’s manufacturers though don’t appear to be enjoying the fruits offered by a lower currency amid worries over the country’s economic future.

In a closely monitored survey, financial information company Markit said Wednesday the region’s manufacturers raised employment levels in March at the fastest rate for over three-and-a-half years.

The reason appears clear enough — the sharp fall in the value of the euro currency over the past few months has made exports emanating from the region much more competitive. That’s evident in Markit’s survey, which found incoming new business at its highest level since last April.

As a result, Markit’s purchasing managers’ index — a broad gauge of business activity — for the eurozone’s manufacturing sector rose to 52.2 in March from 51.0 the previous month. Anything above 50 indicates expansion.

The so-called PMI now stands at a 10-month high, the latest in a string of indicators to point to a step-change in the eurozone’s economic recovery.

Markit found growth accelerated across the eurozone, not just Germany, where car makers such as Daimler are already benefiting. Spain and Italy, two countries at the forefront of the region’s debt crisis over the past few years, were highlighted.

“Producers are benefiting from the weaker euro, which has had the dual effect of boosting competitiveness in export markets as well as making competing imports more expensive in the home markets,” said Chris Williamson, Markit’s chief economist.

“The fact that manufacturers are boosting their payroll numbers at the fastest rate for three-and-a-half years indicates optimism that the upturn will be sustained in coming months,” he added.

In recent months, the euro has notched up one milestone after another as it dropped against major currencies. Last month, it hit a 12-year low against the dollar around the $ 1.05 mark. It’s now trading a little higher than that at $ 1.0750.

The fall in Europe’s single currency has been dramatic — as recently as May, it was trading just shy of $ 1.40 and many firms across Europe openly fretted about the impact on their exports.

One country seemingly not benefiting from the falling euro has been Greece, whose economy has been hobbled by the ongoing uncertainty surrounding the country’s bailout.

Discussions between the new Greek government and the country’s creditors over an economic reform plan have dragged. An agreement between the two is needed if Greece is going to get its hands on the next batch of bailout cash — more than 7 billion euros — that it needs to avoid going bankrupt and potentially exiting the euro. And even if an agreement is reached, Greece will still most likely need financial assistance beyond the summer.

That uncertainty has unsurprisingly prompted a cautious approach among those looking to do business with Greek firms. Markit found the Greek manufacturing sector contracting for the third month running in March mainly linked to a further reduction in incoming new work in the sector, in particular from abroad.

“One major concern is the trend in exports, which up until fairly recently had been acting as a support to the sector but are now an area of weakness as uncertainty deters foreign clients,” said Phil Smith, an economist at Markit.

As a result, he said manufacturers are scaling back production, meaning the sector is dragging down the wider economic recovery, which took root last year after a brutal six-year recession saw Greek economic output shrink by a quarter and unemployment and poverty levels swell alarmingly.

Many economists expect Greece to be officially back in recession when first quarter numbers are published next month.

FOREX-Euro gains against dollar on robust PMI surveys

* Robust French, German PMIs help euro

* Fed’s Williams repeats mid-year rate rise may be appropriate

* Dollar still feeling impact of last week’s dovish Fed statement

* Aussie slips briefly after weak China flash HSBC PMI

By Ahmed Aboulenein

LONDON, March 24 (Reuters) – The euro rose for the third day running against the dollar on Tuesday, bolstered by better-than-expected euro zone business surveys that pointed to a broader recovery taking place in the currency bloc.

The dollar was under pressure, with investors awaiting consumer price inflation data later in the day. A softer number, as was registered earlier on Tuesday in Britain, could boost expectations that the Federal Reserve will be in no hurry to raise interest rates.

San Francisco Fed chief John Williams weighed in on the debate over the dollar’s gains, saying the U.S. economy could handle a stronger currency and pointing to the chance of an interest rate rise in June.

Other Federal Reserve officials, and new forecasts from the U.S. central bank, have cast doubt on how much more appreciation of the dollar the Fed will easily tolerate and raised speculation it will push back any tightening of monetary policy.

The euro was up 0.4 percent at $ 1.0984, having risen to $ 1.10 after the business surveys were released. In a sign the European Central Bank’s bond buying programme may already be paying dividends, the composite purchasing managers’ survey for the 19 members of the euro zone jumped to a near four-year high of 54.1 in March, well above forecasts.

“Any positive surprises from the euro area are further adding to this euro/dollar rally. However, we think this is temporary; we still believe in the dollar strength trend going into the second half of the year,” said Nikolaos Sgouropoulos, FX strategist at Barclays in London.

Many major bank strategists forecast the euro to fall close to parity with the dollar this year, but the pace of its dive to $ 1.05 earlier this month took many by surprise and prompted JP Morgan and HSBC to suggest the rally may be coming to an end.

“The bigger question of whether the economic recovery has any legs remains unanswered,” Societe Generale analysts said in a note.

“In the meantime, after breaking above key resistance at $ 1.0940 yesterday, the euro’s next technical target is $ 1.1070 and we’d be more interested in re-selling there than in looking for much follow-though from this morning’s initial weakness.”

The Swiss franc, meanwhile, rose to a three-week high against the dollar and a six-week peak versus the euro .

Against the yen, the dollar eased 0.3 percent to about 119.40 yen, near the bottom of its 122.04 yen to 119.29 yen range seen over the past couple of weeks.

(editing by John Stonestreet)

The Euro's Going Down. If It Doesn't Go Up.

The euro will be at $ 0.80 by the end of 2017, losing a quarter of its value from current levels and setting new lows, say Goldman Sachs analysts.

No it won’t. The euro will appreciate around 15% to $ 1.20 over the same period, say HSBC’s economists.

These forecasts may be at opposite extremes of the current consensus, which is broadly for more euro weakness from $ 1.06 where it trades now. But they’re both built on solid arguments. Which to believe depends on what your outlook is for how the global economy shapes up.

The Goldman Sachs view is based on expectations that U.S. monetary policy will start to normalize, which is to say the Federal Reserve will at long last raise its key interest rate from the current near-zero levels as the U.S. economy recovers. At the same time that the Fed tightens, the European Central Bank is keeping monetary policy on full throttle. This will cause investors to shift cash from eurozone assets and across the Atlantic.

And though everyone is talking about the strong dollar, the currency is actually “underpositioned,” according to a recent Goldman note, which is to say the money flows haven’t kept pace with the prevalent views.

What’s more, a eurozone recovery won’t initially be good news for the currency, according to the note. Economic strength will see a pickup in domestic demand, which will weaken the region’s current account position and thus tend to push the currency downward.

That doesn’t mean an 80 cent euro is fair value. But history has shown that foreign exchange markets are more volatile than simple models suggest they ought to be. Economists argue that’s because financial markets move faster than the real economy–prices of goods and trade flows–which leads currencies to fall well below their fair value until assets priced in that currency show compelling value.

Indeed, the Goldman analysts estimate the euro’s fair value to be around $ 1.20.

Which, intriguingly, is where the HSBC economists put the euro-dollar exchange rate in around two-and-a-half years’ time.

Their argument is that the dollar’s gains have gone far enough. Excluding monster dollar rallies of the early 1980s and another one in the run up to the end of the millennium, the current surge is substantially bigger than the usual run-of-the-mill dollar surge, having gained a quarter in value since last summer. As a result, HSBC figures the dollar is now one of the world’s most overvalued currencies, second only to the Swiss franc.

The markets have priced in divergent monetary policy paths on the two sides of the Atlantic. The result is that dollar bullishness has become the consensus trade.

But now the strong dollar seems to be taking a bite out of the U.S. economy while the eurozone has been picking up. Whereas U.S. data have consistently surprised on the downside during the past six months or so, Europe’s have surprised on the up.

The Fed has been taking an increasing interest in the dollar’s appreciation. Although the U.S. is a relatively closed econom — so the exchange rate tends to have less impact on domestic fundamentals than it does in, say, the U.K. — the strong dollar has started to eat into the earnings of the U.S.’s multinationals. So far, this hasn’t registered in the jobs numbers. But employment is a lagging indicator and is one of the few points of recent strength in the U.S. economy.

Meanwhile, the rising dollar has put downward pressure on commodity prices, which, in turn, has pushed U.S. inflation down as well. All of which suggests Fed policy will remain accommodative for longer than the consensus expects. And what’s bearish for the dollar will be bullish for the euro. That’s not to say the euro might not weaken further over the near term. But the turning point is near, according to the HSBC analysts.

Who’s right? Foreign exchange markets are notoriously difficult to call. But both euro bulls and bears have strong arguments to fall back on.

Despite rally, trend toward weaker euro: Gartman

Read MoreDollar hammered amid Fed; euro at $ 1.10

In fact, in his newsletter Wednesday morning before the Fed’s statement, Gartman said if the euro got to $ 1.0875-$ 1.0925, he’d start thinking about selling.

The euro surged above $ 1.10 after the statement. The common currency’s one-day gain against the dollar was its largest since March 2009. It had dropped below $ 1.05 for the first time in 12 years earlier this month.

Gartman called the swift moves “amazing.”

“I’ve been trading foreign exchange for 45 years, and other than the …weekend after the Plaza Accord, I cannot recall a day when we saw that many big figures go flying by.”

The 1985 Plaza Accord was an agreement between the G-5 nations to depreciate the U.S. dollar against the German mark and the Japanese yen.

Read MoreDovish Fed whipsaws markets

—Reuters contributed to this story.

Premarket: Weak euro powers European stocks to new highs

The euro struck a fresh 12-year low on Monday and euro zone stocks reached new peaks on bets that the currency’s relentless fall will boost corporate earning prospects just as the rising dollar hits those of U.S. firms.

German stocks powered above 12,000 points for the first time, while the main pan-euro zone benchmark indices hit new seven-year highs.

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The euro rebounded as European trading got under way, however, while U.S. oil prices recovered after slipping to a fresh six-year low, although they were still down on the day.

This week’s focal point for global financial markets is the U.S. Federal Reserve’s policy decision on Wednesday, with the euro/dollar exchange rate likely to remain the dominant driver for major equity, currency and bond markets until then.

“With dollar momentum this strong and investors unlikely to ride any euro rally ahead of the (Fed) meeting, risks for the euro are still to the downside for the next couple of days and any bounces are likely to be limited,” Unicredit FX analysts said on Monday.

In early European trading the euro was up 1/3 of a per cent against the dollar at $ 1.0530, having slid to $ 1.0457 early in the Asian session, its lowest since January 2003.

The euro has lost roughly a quarter of its value versus the dollar since mid-2014 and suffered its biggest weekly fall since September 2011 last week, shedding 3.2 per cent as the European Central Bank launched its trillion euro money-printing scheme.

Goldman Sachs now sees the euro at $ 0.80 by the end of 2017.

European stocks took heart. Germany’s DAX was up 0.85 per cent at 12,001 points, France’s CAC 40 half a per cent higher at 5,039 points, and Britain’s FTSE 100 index up 0.25 per cent at 6,758 points.

The FTSEurofirst 300 index of top European shares rose 0.3 per cent to 1,584 points and the euro zone top 50 stocks index was up 0.5 per cent at a seven-year high of 3,673 points.

MSCI’s broadest index of Asia-Pacific shares outside Japan closed a few ticks higher, while Chinese shares outperformed to hit five-year-highs.

The CSI300 index and the Shanghai Composite Index both rose more than 2 per cent after Premier Li Keqiang said Beijing had scope to adjust policies to help boost the world’s second largest economy.

Japan’s Nikkei hit a 15-year high of 19,349 points Recent weak U.S. inflation and retail sales data have not derailed expectations that the Fed will tighten monetary policy, and the prospects that higher rates and a stronger dollar will hit U.S. corporate profits have dragged on shares.

Wall Street futures were seen opening 0.2 per cent higher on Monday, lagging Europe’s main bourses.

Many observers expect the Fed to remove its pledge to remain “patient” on delivering its first interest rate hike since 2006, with economists polled by Reuters almost evenly split on whether a first hike will come in June or later in the year.

German 10-year Bund yields inched up 1 basis point to 0.265 per cent, having hit a record-low 0.188 per cent last week. Longer-dated German yields fell, however, and benchmark Spanish, Italian and Portuguese yields were also headed back towards their recent record lows.

The ECB is expected to buy more sovereign bonds as part of its stimulus program this week, limiting any upward pressure on bond yields.

“The current dynamic is incredible, logical and extendable … until something changes, but there is little sign of that right now,” Citi rates strategist Mark Schofield said.

Oil prices continued to tumble, with U.S. crude dropping more than 2 per cent at one point to a six-year low on fears of oversupply. The International Energy Agency said on Friday that a global glut of oil is growing and U.S. production shows no sign of slowing.

U.S. crude was last down about 0.8 per cent at $ 44.48 a barrel, while Brent was 0.6 per cent lower at $ 54.32.

After snapping its longest daily losing streak since 1973 on Friday with a first rise in 10 sessions, gold consolidated its gains. Bullion was flat on the day at $ 1,158 an ounce.