USD harmed by talk of interest rates, diversification

Jean Claude Trichet, President of the European Central Bank (ECB) recently cautioned investors to expect EU interest rates to remain at historically low levels in the near-term. Nonetheless, analysts still expect the ECB to raise its benchmark interest rate next month. In fact, interest rate futures, which reflect investors’ collective expectations for future monetary policy, have three rate hikes priced into them. In addition, the last few weeks have seen heightened speculation that Asian and OPEC Central Banks will soon diversify some of their reserves into Euros. Many analysts have opined that the prospective combination of narrowing interest rate differentials and reserve diversification will soon send the dollar on a downward spiral. The Financial Times reports:

The debate was kickstarted by…the central bank of the United Arab Emirates, which may increase the share of its reserves held in euros from 2 to 10 per cent on valuation grounds.

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