In one hand, recent fluctuations in EUR/USD exchange rate have a lot to do with different growth and interest rate expectations for the US and Euro Area. Fist, while the United States economy grew by 5.7% qoq in the fourth quarter of 2009, the Euro Area expanded only by 0.1%. Second, in December, the Federal Reserve signaled an exit strategy from quantitative easing. Third, in February the Fed surprised financial markets with a hike in the discount rate by 25bp to 75bp increasing the possibility of an overnight interest rate hike within the next few months. Eventually, making foreign investors more optimistic about gains in US dollar holdings.
On the other hand, the US labor market remains weak and the US recovery may stall in the second part of 2010 as the boost from fiscal and monetary stimulus fades away. Moreover, concerns about Greece, Spain and Ireland’s fiscal instability have pushed the euro to fresh new lows. However, we can't forget that not a long time ago it was the investors concerns about rising US fiscal deficit and national debt, that was dragging the dollar down. And sooner or later the structural imbalances in the US will take the center stage in currency markets.