The euro rose to a seven-week high against the US dollar yesterday (21 August), fuelled by speculation the European Central Bank could soon act to stem the region's debt crisis by lowering Spanish and Italian borrowing costs.
Throughout August the euro has rallied and plunged almost daily depending on the latest headlines from Europe. Uncertainties over the effectiveness of ECB bond-buying and worries over the eurozone's debt and economic problems had kept the currency firmly below this month's high of $1.2443.
The euro, however, pierced that level after London's Daily Telegraph on Monday gave support to a weekend article in Germany's Der Spiegel magazine that said the ECB planned to put a hard cap on Spanish and Italian bond yields.
"We're in the midst of a risk rally, with expectations high around what could happen in the first couple of weeks of September," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
The ECB holds its next policy meeting on 6 September and European Union finance ministers meet on 14-15 September – 10 days seen as critical for efforts to quell the crisis and keep Greece in the single currency.
German banks want more power for ECB
Amid speculation of a more assertive role for the ECB in lowering debt costs, Germany's private sector lenders called for giving broad watchdog powers over all eurozone banks to the ECB to eliminate interference by politicians in banking supervision.
The BDB banking association, which represents big lenders like Deutsche Bank and Commerzbank, says placing national bank supervisors under ECB authority would promote consistent regulation and could be put in place quickly.
"The influence of national politics in supervision would be removed," the BDB said in a paper laying out its proposal for future bank supervision.
The BDB hopes its ideas will feed into the thinking of the European Commission, which is preparing sweeping changes to the way banks are supervised – including giving oversight to the ECB – after a series of melt-downs at banks in the financial crisis.
European Union leaders agreed at the end of June to set up a single banking supervisor in Europe as a pre-condition to letting the eurozone's rescue funds directly inject cash into struggling lenders, without lending to a government first.
It is part of a wider EU effort to stop the banking and eurozone debt crisis feeding each other.
The BDB's demand that the ECB regulate all 6,000 eurozone lenders contrasts with the views of Germany's public sector and cooperative banks, which say central supervision is needed only for the 25 big banks that pose a threat to the financial system in the currency bloc.
The ECB would need to set up an independent unit for banking supervision to maintain a clear separation from its monetary policy duties, such as setting interest rates.
However, there were some problems that would still need to be sorted out, such as the lack of administrative law giving the ECB powers to enforce its decisions over banks, and a mechanism for banks to redress ECB rulings they found unfair.
The BDB also suggested that the ECB could take over the voting rights of its member countries in organisations such as the European Banking Authority or the Basel Committee of bank supervisors, a move that would give the central bank extra heft relative to outsiders such as the UK.
"The ECB must act in the bond market because threats, leaks and promises have a limited lifespan. Without ECB intervention Spanish and Italian rates will rise again as the countries no longer have the confidence of the credit markets," Joseph Trevisani, chief market strategist at Worldwide Markets, Woodcliff Lake in New Jersey, told Reuters.
The euro rose to $1.2488, its highest since 5 July, exceeding the 6 August peak of $1.2443 reached after ECB President Mario Draghi pledged to do all it takes to preserve the euro. Prior to Draghi's comments, the single currency fell to a two-year low of $1.2040 on 24 July.
French President François Hollande and German Chancellor Angela Merkel will meet on 23 August, a day before Greek Prime Minister Antonis Samaras arrives in Berlin.
Samaras is expected to lobby for a two-year extension of austerity measures to soften their impact, though he is unlikely to win major concessions.
- 6 Sept.: ECB policy meeting
- 14-15 Sept.: EU finance ministers to meet