The euro rallied against most of its major peers as signs of an improving outlook for growth and inflation helped increase government-bond yields in the 19-nation region.
The common currency strengthened as German 10-year yields reached the highest in eight months, narrowing the spread with U.S. Treasuries to the least since early February. The European Central Bank upgraded its inflation forecast for this year Wednesday. Greece’s Prime Minister Alexis Tsipras was meeting with allies after discussions with creditors on the nation’s finances.
“The euro is being driven by what’s happening in the bond market,” Christin Tuxen, a senior analyst at Danske Bank A/S in Copenhagen, said by phone. “The ECB yesterday put focus back on the fact that deflation is not going to last in the eurozone forever. Hence you are starting to get a pre-warning of what could happen later in the year when euro zone inflation is actually going to tick higher.”
The euro was little changed at $1.1273 at 9:11 a.m. New York time, after gaining 3.2 percent in the previous two days. It added 0.1 percent to 140.27 yen.
ECB President Mario Draghi said on Wednesday inflation would start picking up later this year, following on from a report on Tuesday that showed consumer prices in the euro region rose more in May than economists estimated.
The market outlook for inflation, as measured by five-year German break-even rates, rose to 0.81 percentage point, compared with minus 0.26 percentage point in January.
“German bond yields are flying as people are re-pricing growth and inflation,” said Peter Rosenstreich, head of market strategy at Swissquote Bank SA in Gland, Switzerland. “With lower interest rate differentials between bunds and Treasuries, traders are piling back into the euro from the dollar.”
Germany’s 10-year bond yield reached almost 1 percent before trading at 0.85 percent. They tumbled to a record-low 0.049 percent on April 17.
That’s helped the euro to gain 2.3 percent during the past month against nine developed-market peers, according to Bloomberg Correlation-Weighted Indexes. It’s still down 3.6 percent year-to-date, the indexes show.
Greece, which hasn’t yet reached a debt deal with its creditors, looked closer to finding a resolution this week after a flurry of activity starting with European leaders and the International Monetary Fund meeting in Berlin on Monday night. Tsipras now returns to Athens with the euro region pressing for an agreement to be wrapped up by June 14, according to a Greek official.