The euro continues to depreciate against the US dollar. The slide has increased dramatically in the past few weeks. An interruption in the EU-wide gas supply from Russia could accelerate the decline. The ECB appears helpless.
Euro – Dollar 1 year
Börsen-Zeitung: “The dollar shows its strength”, market comment by Christopher Kalbhenn
UBS captioned its weekly currency outlook on Friday with “a show of currencies”. An Accurate Description of Current Events in the Foreign Exchange Markets: Why the Dollar is in a Spectacular High, which has recently accelerated. At the end of the week, the dollar index, which measures the performance of the US currency against a basket of other developed market currencies, was slightly above 103 points, up about 5% at the end of April, the monthly performance strongest for the US currency since the year 2015.
Last but not least, it is the very uncertain context, characterized above all by the war in Ukraine and the lockdowns in China, which is pushing market participants in search of security in the dollar, as occurred in the previous shock phases, for example after Lehman -Crash, in the euro sovereign debt crisis and after the start of the crown pandemic. Furthermore, the economic prospects of Europe and China are currently significantly weaker than those of the United States due to the aforementioned factors.
Last but not least, UBS talks about a “one-currency show” because the classic safe-haven currencies, the Swiss franc and the yen, had to give up the dollar, despite the very uncertain environment. The Swiss franc has lost 6% since the beginning of the year and the Japanese currency is actually the big loser this year with a loss of more than 11%. While the Fed has made it clear that it intends to take vigorous action against inflation and its chairman Jerome Powell has signaled a 50 basis point hike in interest rates for next week’s central bank meeting, the Bank of Japan has clarified last week as it intends to stick to its extremely accommodative monetary policy. The result was a 20-year low for the Japanese currency at just over 131 yen per dollar.
This was one of the impulses that have accelerated the dollar’s rally again in recent days. The other was Russia’s announcement that it would cut off gas supply to EU members Poland and Bulgaria. This pushed the euro below $ 1.05. Europe and, last but not least, Germany, which is particularly dependent on Russian energy supplies, would be severely affected by a disruption in Russian gas supplies. A recession would be the inevitable result. Against this backdrop, experts already see parity between the common currency and the dollar at hand.
In addition to the war in Ukraine, the European Central Bank (ECB) probably holds the key to this. The pressure on the central bank increases with each week that other central banks raise their key interest rates. Last week Swedish watchdogs announced the end of their zero interest rate policy by raising the key interest rate. In addition to the Fed, the Bank of England is also expected to raise interest rates again next week. The weakness of the euro increases the pressure as it feeds very high inflation. The price of crude oil (Brent type) calculated in dollars has increased by about 41 per cent since the beginning of the year. From the point of view of the euro area, there is then a devaluation of the common currency of about 7%, its fall below parity would make crude oil another 5% more expensive, ceteris paribus.
Precisely because the pressure is mounting, the ECB may soon be giving even clearer signals that a rate hike is imminent. This would probably drive the euro. Furthermore, a freezing of gas supplies across the EU by Russia is not a foregone conclusion; its absence could at least stabilize the euro above par. Experts also assume that the Fed will not raise its benchmark rate as significantly in the medium term as the market currently expects, because they assume that interest rate hikes will ultimately significantly weaken growth in the United States. It is therefore entirely possible that the euro’s low point, above or below parity, is not that far after the recent dip.