US dollar to euro hits 2-month high, as US spending cuts kick in

The US dollar is back in action! America’s currency rose to its highest point against the euro since January 3rd this week, or almost two months, to 0.7659.

How come? First, because automatic spending cuts worth $85bn have come into force in the States, following US leaders’ failure to agree a deficit reduction plan. That’s led investors to shelter in the safe-haven greenback. Second, because Italy remains in deadlock, following its weekend election.

To put this into context, the US dollar was at 0.732 against the euro at the start of February, meaning it’s since climbed more than 3 cents. A $250,000 transfer is hence worth €8.475 more than a month ago. (Please bear in mind, these are the interbank rates at the time of writing, meaning the exchange rate might have changed since then.)

The US dollar to euro on the up, up and up?

So, whither next for the US dollar to euro exchange rate? Well, odds are high the greenback will keep climbing against the common currency.

First, this is because this $85bn in automatic spending cuts will hit the US economy like the flu, unless they’re sidestepped. As Kathy Lien at BK Asset Management said today, even the US government “will be forced to shutdown if no additional measures are taken.” That will lead more investors to seek safety from the storm in the buck.

Second, there no telling how long Italy will remain in limbo! Right now, the country simply can’t form a government, as 5-Star leader Beppe Grillo shudders at the thought of a deal with leftist Pier Luigi Bersani, and Bersani is unable to sink as low as work with Silvio Berlusconi. That leaves both Italy’s future, and the euro, in doubt.