Less Liquidity — Stronger Euro. Or Not?

The single European currency tried to break the latest resistance level, set 8 days ago, as the future of the macroeconomic conditions around the euro were revised after
Jean-Claude Trichet‘s statement today. But, unfortunately for the euro, the growth wasn’t long lived.
Although the economical recovery, outlined by the European Central Bank President, isn’t equal throughout the Eurozone, the banker decided to reduce some of the financial operations used to aid the region. The ECB meeting also decided to leave the benchmark interest rate unchanged at 1 percent. An important part of the released statement reads:

With all the measures we have taken in response to the intensification of the financial crisis, we have supported both the availability of liquidity to the banking sector and the recovery of the euro area economy. As the transmission of monetary policy works with lags, we expect that our policy action will continue to progressively feed through to the economy. We will continue our enhanced credit support to the banking system, while taking into account the ongoing improvement in financial market conditions and avoiding distortions associated with maintaining non-standard measures for too long.

So, why the basically beneficial news — and the decrease of the euro liquidity is positive for the currency (as it reduces the supply) — caused only a spike in the EUR/USD rate and then the euro returned to near the open level versus the dollar? The answer is simple — fear. Many currency traders still don’t believe in a fast recovery. The measures by ECB to scale down the emergency measures may be premature, which will spur another wave of crisis. And the speculators move to the safe haven of the U.S. dollar. Of course, such movements aren’t usually long-term and we’ll probably see a continuation of the current euro’s long-term bullish trend soon.
EUR/USD increased slightly today — from 1.5047 to 1.5053 after reaching as high as 1.5140 during the early trading session. EUR/GBP went up from 0.9040 to 0.9102, while EUR/JPY rose from 131.80 to 133.02 today.

If you have any questions, comments or opinions regarding the Euro,
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