Foreign exchange market: how much can the euro go down?

Status: 13/06/2022 12:18

Speculation of sharp rate hikes by the US Federal Reserve is driving the dollar. Even the parity between the euro and the US currency cannot be ruled out. What does this mean for the eurozone economy?

The world’s major currency, the dollar, is becoming more expensive as the euro has dropped to its lowest level in nearly a month, sometimes to $ 1.0474. About a year ago, the common currency was quoted at more than $ 1.20.

The reason for the current weakness of the euro is current US inflation: the inflation rate for goods and services rose to 8.6 from 8.3 percent in May. Experts therefore expect the US Federal Reserve (Fed) to tighten monetary policy at a rapid pace to fight inflation.

“Inflation hasn’t peaked, it’s not even stagnant. It’s still accelerating and is likely to do so in June,” said Aneta Markowska, a financial market expert at Jefferies investment bank. “The inflation data is a game changer, forcing the Fed to shift into higher gear and accelerate monetary tightening.”

Different rates of reversal of interest rates

Although the ECB recently initiated a turnaround in interest rates, the Fed is taking stronger action against inflation. The US Federal Reserve also raised interest rates much earlier. Due to the higher interest rates, the dollar is particularly in demand in the currency markets and the rate is rising. Furthermore, investors see the greenback as a so-called safe haven in times of crisis: Investors who want to minimize risk invest their money in dollars.

How much can the euro go down? A few weeks ago Vincent Mortier, chief strategist of Europe’s largest asset manager Amundi, told the Financial Times (FT) that he expected dollar-euro parity this year.

Other experts are less pessimistic about the common currency. For example, Sam Zief, a currency trading expert at US-based JPMorgan Private Bank, recently told US broadcaster CNBC that while he thinks parity is possible, it’s not the baseline scenario for him.

The consequences of a weak euro

According to experts, a cheap euro is particularly beneficial to the German economy, which is dependent on exports, because products abroad become cheaper. Imports from countries outside the euro zone, on the other hand, are becoming more expensive. As a result, the demand for household goods is expected to increase, which could have a stimulating effect on the European economy.

At the same time, there are serious drawbacks. They are particularly evident in the current situation of high energy and commodity prices: on the commodity market, particularly the oil market, payments are generally made in dollars. In addition to prices, which however are currently rising, there is also the effect that the weak euro is having a further negative effect. This in turn could further exacerbate inflation.

The euro may soon continue to decline: the US Federal Reserve is expected to raise interest rates by half a percentage point when it makes its interest rate decision next Wednesday, says IG analyst Salah-Eddine Bouhmidi. “But after Friday’s US inflation data, a 75bp hike is no longer out of the question.” Should the Fed take this step, the euro is likely to suffer further.

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