The single currency falls more than 11% in the year due to uncertainty due to the impact of the war and the lukewarmness of the ECB in the rate hike cycle
I can not take anymore. The weakness of the euro and the strength of the dollar that has marked the cross between the two currencies in recent months led this Tuesday to a situation that had not been seen since December 2002: parity, the one to one that marks that one euro is worth same as a dollar.
The single currency thus culminates a tortuous path that has led it to depreciate against the greenback by more than 11% since the beginning of the year, when the cross stood at 1.13 dollars. Of the last ten sessions, the euro has traded lower in eight of them. 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 withdrawal between the US Federal Reserve (Fed) and the European Central Bank (ECB). While the region’s monetary body will undertake the first rise in the price of money since 2011 at the end of July, the Fed already began normalizing its monetary policy in March, with a rise of 25 basis points, which was followed by rises of 50 and 75 basis points, respectively, at the next two meetings.
The second factor for the worse performance of the euro is the economic uncertainty in the region after the outbreak of the war in Ukraine. Above all, given the evidence that the US economy is much better prepared to face a crisis that touches it sideways, as it is a net exporter of energy compared to Europe’s high dependence on Russian gas.
The Fed has already made three increases in the price of money since March: 25, 50 and 75 basis points
The Fed has made it clear: the country is prepared to withstand further increases in interest rates to control inflation, despite the fact that this implies a temporary entry into recession. A scenario that is more complicated for Europe.
The third factor in the weakness of the euro is precisely this fear of recession, which has caused investors to flee towards assets traditionally considered safe havens, such as the dollar or the euro.
“If we take into account the short-term rate differential of 2.50% in favor of the dollar, the greater economic vulnerability of Europe due to the conflict in Ukraine, the almost absolute dependence on foreign energy in the face of US self-sufficiency, and the traditional agility of the world’s leading power to face a potential crisis, this strength of the dollar should not surprise us”, the experts agree.
Investors seek refuge in assets considered safer such as the greenback
Hernán Cortés, a partner at Olea Gestión, warns however “the calm with which the Fed is observing this movement between the two currencies”, taking into account that the GDP data for the first quarter was negative largely due to the foreign sector. “At a time like the present, where growth is becoming a scarce resource, having the currency so appreciated only has one justification, and that is that the Fed prioritizes inflation over growth,” says the expert.
For his part, José Manuel Villamor, director of Weather Management at A&G, predicts that the euro will remain weak “as long as the war is not resolved and energy prices fall.”
An uncertain future
“The dollar is strong in general 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 is one of the largest deficits in energy production, having to pay more and more dollars to satisfy its demand and not being able to raise interest rates at the same rate as other economies despite their high inflation due to their greater risk of recession and high government debt”, adds the expert.
It is true that the greater weakness of the euro may favor the competitiveness of the region’s exports via price. But for the consumer, this situation will ultimately mean higher inflation and lower purchasing power.
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