Euro Gains, Leaving Political Concerns Behind to Focus on Growth

The euro rose to a seven-month high against the dollar after Emmanuel Macron won the French presidency on Sunday, a victory that should continue to boost the currency as political concerns fade and investors focus on the eurozone's economic recovery.

The euro rose to as high as $1.1021 in the hours after voting closed, rising by around 0.3% from Friday's close.

Mr. Macron's win ends a series of votes in Europe that have spurred worries that a rise of populist politicians could threaten the euro. That helped prompt a long period of weakness for the single currency, even as the eurozone posted increasingly strong economic data that has outpaced the U.S. recently.

With the uncertainty lifting and economy doing well, the European Central Bank is more likely to taper the massive stimulus program that has helped keep pressure on the euro.

On Sunday, early projections showed 65.5% of voters cast ballots for Mr. Macron, a pro-European Union former banker.

"Populism hasn't gone away, but for now it's been pushed onto the back burner," said Jane Foley, senior foreign exchange strategist at Rabobank. "It's going to be more economics and less politics for the next six, eight, nine months," she said, predicting the euro will end the year at around $1.10.

The single currency fell to as low as $1.035 in late December, and many analysts were betting it would fall to parity with the dollar by the end of this year.

The euro already has risen in recent months, forcing investment banks to boost their outlook for the common currency. The currency closed up 1.2% the day after Mr. Macron finished higher than Ms. Le Pen in the first round of the election. Last week, Bank of America Merrill Lynch and Deutsche Bank both raised their forecasts for the euro, to $1.08 and $1.02 at the end of 2017, from $1.05 and 97 cents respectively.

"As Emmanuel Macron is a centrist, pro-European reformist, who aims to reduce public deficits and boost economic growth, his election should ease global concerns about political risks in Europe," said Vincent Durel, a fund manager at Fidelity International.

Ahead of Sunday's election, investors were reducing their short positions against the single currency as they began to bet that anti-euro candidate Marine Le Pen's chances of being French president were fading.

Fewer investors are now shorting the euro than at any time in the past three years, according to data from the U.S. Commodity Futures Trading Commission. In the week to May 2, there were only 1,653 more short than long contracts against the euro, sharply down from 127,434 in November.

The number of short contracts peaked at 127,434 in November and is now near its lowest levels since the middle of 2014, before the ECB's bond-buying program began.

The ECB is still buying EUR60 billion ($65.5 billion) in government and corporate bonds each month. Minutes from the ECB's governing council meetings show that officials' worries about political uncertainty were one reason they were keeping monetary policy unchanged.

Investors now expect the central bank to signal in June that it is closer to tapering its buying program, so-called quantitative easing.

The central bank's negative-interest-rate policy and asset buying has put pressure on the euro because it pushes down bond yields, making the region less attractive for foreign money looking for income and driving up the local currency in the process.

A faster reversal of the program would likely mean a stronger euro, analysts say.

"If you see strong growth we could see a very sharp cliff for quantitative easing, meaning very little QE in 2019," said Alain Zeitouni, senior portfolio manager at Russell Investments. "That's not our base case, but it would create big volatility in fixed income and currency markets."

Few doubt, though, the brighter economic prospects. Core inflation reached its highest level in four years in January and business surveys suggest the stronger economic growth is continuing.

That has helped spur better prospects for equities in the region, which will also buoy the euro as they attract foreign money.

Foreign investors fled European equities in 2016. According to data provider EPFR Global, $7.66 billion has entered European equity funds in the year to date.

To be sure, not all forecasters see the euro powering higher from here, or even holding its current gains.

For a start, political and economic risks haven't completely gone away. Italy needs to call a national election before May 2018 in an election that could see anti-euro candidates gain ground in a country beset by economic problems.

Joe Prendergast, a strategist at Credit Suisse, also points out that interest rates in the eurozone remain way below those in the U.S.

U.S. two-year bond yields are now 2 percentage points higher than their German equivalents, near the highest levels on record. As recently as the end of 2011, German short-term yields were higher than their U.S. peers.

Write to Mike Bird at Mike.Bird@wsj.com

(END) Dow Jones Newswires

May 07, 2017 17:37 ET (21:37 GMT)