The European Central Bank (ECB) says it will keep a close eye on the exchange rate of the euro on Wednesday. A cheap euro can drive up inflation and the central bank is not waiting for that effect. On Tuesday, the euro was worth less than 1 dollar for a short time.
A cheap euro can have advantages for exports. European products then become cheaper for customers who pay in euros. At the same time, things that we pay in dollars are more expensive to import. Crucially, oil, which is already expensive, is traded in dollars. Europe also wants to obtain more and more liquefied natural gas (LNG) from various countries, including the United States.
Energy is precisely one of the things that has pushed inflation up sharply lately. The cheap euro against the dollar is thus again pushing up prices. The dollar has become relatively expensive because the US central bank, the Federal Reserve, has been raising interest rates for some time. In addition, the US economy is less affected by the war in Ukraine and sanctions against Russia.
Euro is under pressure
The euro has been under pressure for some time due to the increasing risk of a recession in the euro area. This is fueling speculation in the financial markets that the European Central Bank (ECB) will become more cautious about raising interest rates in the eurozone.
Higher interest rates mean that households will save more and spend less. But for the economy to run smoothly, it is important that people continue to make large and small purchases and not hoard their money.
The ECB is therefore in a dilemma: curb inflation by raising interest rates or prevent a recession by lowering interest rates. For the time being, the central bank plans to raise its interest rates by 0.25 percentage point later this month.