Euro Stabilizes as Oil Plummets

The euro rose from its lowest point over a decade against the dollar as oil prices continued to fall.

For the second day straight, the euro rose slightly against the U.S. dollar even as analysts await news from the Federal Reserve’s Federal Open Market Committee about its plans to change its Federal funds rate target. Many economists expect the FOMC to remove the word “patient” from its statement, hinting to the market that a rate hike is set to come as early as June.

The euro rose from its lowest point over a decade against the dollar as oil prices continued to fall.

For the second day straight, the euro rose slightly against the U.S. dollar even as analysts await news from the Federal Reserve’s Federal Open Market Committee about its plans to change its Federal funds rate target. Many economists expect the FOMC to remove the word “patient” from its statement, hinting to the market that a rate hike is set to come as early as June.

In pre-market trading, U.S. stocks fell nearly one half of one percent on fears that equities will lose out to Treasuries as yields on bonds rise. The FOMC will release the minutes of its meeting on Wednesday.

The euro gained one-half of a percent in early morning trading against the U.S. dollar, buying 1.0632 USD in Tuesday morning trading. The euro also appreciated over one percent against the British pound, as the currency tests a bottom after losing nearly 7% against the USD in the last month.

Dollar, Job Strength Remains

Investment banks are warning some clients that the euro’s recovery is temporary, and the U.S. dollar will continue to gain even if the Federal Reserve does not remove the word “patient” from its statement.

With quantitative easing just beginning in the Eurozone, analysts warn that over a trillion new euros of liquidity will depress the euro’s value, which will in turn make the U.S. dollar stronger on a relative basis. At the same time, labor market improvements in the U.S. are also strengthening the U.S. dollar.

The U.S. unemployment rate has fallen to 5.5%, and analysts expect that to fall further in March as the job market continues to tighten. Analysts also believe marginal and discouraged workers are only beginning to see the benefits of an improving labor market, and that trend will continue throughout the year.

A much broader measurement of unemployment known as the U-6, which measures marginally employed part-time workers and discouraged workers, has fallen to 11% from a height of nearly 18% in 2009. That gauge expects to fall further in 2015, and may fall below 10% by the end of the year.

Oil Gets Cheaper

After remaining roughly range-bound over $50 per barrel, WTI oil futures fell steeply in the last week and have reached a new 52-week low of less than $43 per barrel. The fall in oil prices is largely due to record-level inventories, with oil in storage rising to 449 million barrels, according to the U.S. Energy Information Administration. The stockpile continues to rise by a rate of 1% of total inventories per week.

The stockpiles have caused new drilling activities to plummet, but output in the U.S. remains high, leading some analysts to call for even lower price targets for oil. One analyst at Citigroup Global Markets noted that oilrigs are likely to continue to decline and oil supply is likely to remain strong. As a result, supplies will continue to rise and oil prices are likely to fall. Another analyst at Scotiabank said the oil inventories are a “mystery”.