The euro fell in European trading on Monday against a basket of global currencies, continuing to trade in negative territory for a second straight session versus the US dollar, under the watch of European monetary authorities, who warned that excessive strength in the euro exchange rate could renew inflation pressures in Europe.

The US dollar continues to advance in the foreign exchange market, supported by broad investor approval of Donald Trumps nomination of Kevin Warsh as the next Federal Reserve chair.

Price overview

The EUR/USD exchange rate fell by 0.1% today to $1.1839, from the days opening at $1.1851, and recorded an intraday high at $1.1875.

The euro ended Friday down 1.05%, marking its second daily loss in the past three sessions, due to correction and profit-taking from a five-year high at $1.2082.

Over January, the euro gained 1.1% against the dollar, posting its third consecutive monthly gain, supported by positive expectations for European economic growth and the assumption that European interest rates will be kept steady for as long as possible this year.

European monetary authorities

The euros rise above the $1.20 level for the first time in five years raised concerns among European monetary authorities, prompting European Central Bank policymakers to issue a series of warning remarks about the impact of currency strength on the outlook for inflation and economic growth.

Economists noted that a stronger euro could amplify the deflationary effect of strong Chinese exports, push the European Central Bank out of its comfort zone, and drive it toward further interest rate cuts.

Opinions and analysis

Geoff Yu, EMEA macro strategist at BNY, said that although the euro-dollar exchange rate stayed well above the ECBs baseline scenario last year without triggering strong deflation risks, trade uncertainty remains in place.

Ray Attrill, head of FX strategy at National Australia Bank, said that ECB comments appear independent, but it is notable that the $1.20 level in EUR/USD seems to have acted as a trigger point.

Attrill added that the move in the euro/dollar pair, which was not especially strong until recently, somewhat masks broader euro strength, which will in turn be reflected in the ECBs inflation expectations.

US dollar

The dollar index rose 0.15% on Monday, extending gains for a second straight session and recording a one-week high, reflecting continued strength in the US currency against a basket of global peers.

This rise comes as markets welcomed President Donald Trumps nomination of Kevin Warsh to lead the Federal Reserve, a move that strengthened confidence about the future direction of monetary policy.

Expectations have increased that the Federal Reserve may adopt a more hawkish approach to fighting inflation, prompting traders to increase long positions in the US dollar against major and minor currencies.

John Higgins, chief economist at Capital Economics, said the market reaction to Trumps nomination of Kevin Warsh as Federal Reserve chair broadly matches the view that the president made a relatively safe choice.

Higgins added that the prevailing impression is that Warsh is not fully under presidential influence and is unlikely to undermine Federal Reserve independence or intensify concerns about currency weakness.