Upset by the Euro's Continued Strength? Blame the Central Banks

NEW YORK (TheStreet) -- Last Thursday I wrote that the recent actions taken by the European Central Bank would cause the euro to fall against the dollar.

I also wrote that hedge funds already had been betting on a fall in the euro against the dollar, which had resulted in a decline from about $1.393 in the middle of March to $1.36 just before the ECB announced its changes.

Guess what? The value of the euro did decline initially in reaction to the ECB's moves. As I wrote Thursday, "The early results: The euro plunged to a four-month low against the dollar after the ECB announced the package, falling 0.7% to $1.3503 from more than $1.36 before the central bank's rate cuts."

By Tuesday morning, however, the euro was trading around $1.355.

What happened?

Well, some analysts argued that investors (the hedge funds) had correctly anticipated the changes the ECB made and there was little room for further declines.

If one looks at other markets, however, it appears that not everything could have been discounted already by the foreign exchange market.

Yields on the sovereign debt of Spain, Portugal, and Italy fell after the ECB announcement on Thursday, and the spread between the yields on those securities and on German bonds of similar maturities have reached postcrisis lows this week.

Furthermore, the stock markets in these countries have risen by about 3% since the ECB announcement.

But, the value of the euro did not fall against the dollar as expected. Mario Draghi, president of the ECB, had previously indicated that he wanted the eurozone's currency to decline because this would help increase exports from the region and fuel faster growth.

If you liked this article you might like

Manufacturing Jobs Will Continue to Decline, and There's No Quick Solution

Amid Rising Stock Market Uncertainty, Equities Must Price in Risk

European Union Must Get Its Act Together, as Time Is Running Out

Quantitative Easing Is Not the Long-Term Answer for Europe's Economy

Morgan Stanley Continues to Approach Its Return on Equity Target