LONDON — The euro is holding steady against the dollar on Tuesday as investors take a breather from its strong rally on Sunday night into Monday.
The single currency jumped more than 2% on Sunday evening as it became clear that centre-left candidate Emmanuel Macron had secured a place in the second round of the French presidential election, winning the biggest share of the vote at the same time.
Macron — the most pro-EU candidate on the ballot — won 24% of first round votes, beating far right, anti-EU candidate Marine Le Pen by more than 2%. The two will now face a run-off to determine who will be president on May 7. Polls suggest that Macron should win the second round comfortably.
That is a big bonus for investors who are fretful about the prospect that a Le Pen presidency could lead to France withdrawing from the eurozone, plunging the project into chaos and risking its total break-up. With Macron in the Elysee Palace, such an outcome is incredibly unlikely.
While the euro surged on Monday, its movements on Tuesday have been relatively placid so far, moving just 0.12% higher from its starting position on the day, trading against the dollar at $US1.0880 as of around 8.15 a.m. BST (3.15 a.m. ET). Here is the chart:
What happens next to the euro is something of an unknown, with forecasters torn on whether it will continue to rise as confidence in the future of the EU grows, or if it will drop on the back of a growing interest rate differential between the eurozone and the USA.
The euro could move as high as $US1.15 in the aftermath of Macron taking a first round lead, analysts from Nomura said on Monday. However, Deutsche Asset Management, the money management arm of German giant Deutsche Bank, recently argued that the euro is heading for parity against the dollar, regardless of the outcome of the election.
That is because the gap in interest rates between the USA and the eurozone will continue to grow in coming months as the US Federal Reserve tightens monetary policy.
Broadly speaking, higher interest rates push a currency’s value up in relation to others. This is because if interest rates are higher in the US than Europe, dollar-denominated investments in the US create higher returns. That, in turn means more people want dollars against the euro, with that demand pushing the currency higher.
See the latest EUR-USD movements here.