The single currency is down more than 11% in the year on uncertainty from the impact of the war and the ECB’s lukewarmness in the rate hike cycle
I can not handle it any longer. The weakness of the euro and the strength of the dollar that have formed the crossroads between the two currencies in recent months led this Tuesday to a situation not seen since December 2002: parity, the one-to-one that indicates that one euro is the same amount. worth as a dollar.
The single currency thus ends a tortuous path that has resulted in it depreciating more than 11% against the dollar since the beginning of the year, when the cross was $1.13. The euro has traded lower in eight of the last ten sessions. And there are multiple factors that explain this behavior, although analysts summarize them in three.
On the one hand, the open gap in the pace of stimulus withdrawals between the US Federal Reserve (Fed) and the European Central Bank (ECB). While the region’s monetary body is set to implement its first money price hike since 2011, the Fed began normalizing its monetary policy as early as March, up 25 basis points, followed by 50 and 75 basis point gains on the next two. meetings.
The second contributing factor to the euro’s deteriorating performance is the economic uncertainty in the region following the outbreak of the war in Ukraine. Especially given the evidence that the US economy is much better prepared for a crisis that affects it sideways, as it is a net exporter of energy compared to Europe’s heavy reliance on Russian gas.
The Fed has made it clear: the country is prepared to withstand further rate hikes to contain inflation, despite the fact that it means a temporary recession. A scenario that is more complicated for Europe.
The third factor in the euro’s weakness is precisely this fear of a recession, which has caused investors to flee to assets traditionally regarded as safe havens, such as the dollar or the euro.
“If we take into account the short-term interest rate differential of 2.50% in favor of the dollar, Europe’s increased economic vulnerability due to the conflict in Ukraine, its near-absolute dependence on foreign energy in the face of US self-sufficiency , and the traditional agility of the world’s leading power to cope with a potential crisis, this strength of the dollar should not surprise us,” the experts agree.
However, Hernán Cortés, a partner at Olea Gestión, warns of “the calmness with which the Fed is observing this move between the two currencies”, bearing in mind that first-quarter GDP data was negative, largely due to foreign exchange. sector. “At a time like today, where growth is becoming a scarce commodity, there is only one justification for the currency to be so valued, and that is that the Fed is prioritizing inflation over growth,” the expert said.
For his part, José Manuel Villamor, director of Weather Management at A&G, predicts that the euro will remain weak “until the war is resolved and energy prices fall”.
“The dollar is generally strong against the rest of the currencies, but we understand that the euro is the one that has suffered the most from the current situation, as it has one of the biggest deficits in energy production, which needs more and more dollars to meet demand and are unable to raise interest rates at the same rate as other economies despite high inflation due to their greater risk of recession and high government debt,” the expert added.
It is true that the greater weakness of the euro could boost the competitiveness of the region’s exports through price. But for consumers, this situation ultimately means higher inflation and lower purchasing power.
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
