by Julia Gro, uro on Sunday
fIt’s been 20 years since the euro was worth as little in dollars as it is now: on December 4, 2002, the then still young common currency reached par with the dollar. The big difference to today: In 2002, a 1:1 exchange rate was a positive development, because the euro had been weaker before that, its low in October 2000 was $0.8270.
advertising
Trade EUR/USD and other currencies with leverage (long and short)
Currently, however, the European currency has been in free fall for weeks. Economists consider it rather unlikely that the old low of 83 US cents will be tested, but for many it seems a settled matter that the euro can fall further into the area towards 0.90 dollars.
A lot speaks for the dollar
Because apart from the keyword “oversold”, there is currently nothing that speaks for a trend reversal. This is due to the energy crisis in Europe. The exorbitantly increased prices for gas and oil fuel inflation in the euro zone. Unlike the American Fed, however, the European Central Bank cannot counteract this by raising interest rates as much, since high interest rates would cause problems for some highly indebted EU member states. Nobody wants to risk another euro debt crisis: Advantage dollar.
In addition, the energy crisis could push Europe’s economy into recession. “The recent devaluation of the euro against the US dollar shows that, from a market perspective, this outweighs the risk of a US recession triggered by interest rate hikes by the Fed,” says Antje Praefcke, foreign exchange expert at Commerzbank. Again: Advantage Dollar.
Energy crisis as worst case
“As long as concerns about an energy crisis in Europe dominate the foreign exchange market, the euro has little potential for recovery against the US dollar,” Praefcke is convinced. But what if this worst case does not occur? Then the European Union could scrape past a recession, while the US economy would be slowed down sharply by the Fed’s strict rate hike course. That should send the euro on a recovery course against the dollar.
But it can also happen that both economic areas weaken. After all, there are enough other stress factors with the supply chain and personnel problems. Then again, writes Commerzbank’s foreign exchange department, the dollar would once again have an advantage. Because the Fed would then have more leeway from its then significantly higher interest rate level to support companies by lowering key interest rates. The ECB, on the other hand, would quickly run out of ammunition and would have to resort to indirect measures such as buying bonds worth billions.
In this respect, there may be short-term attempts at a recovery of the euro exchange rate against the dollar – with high levels of nervousness on the markets. Overall, however, the uncertainty is immense and a sustainable trend reversal is unlikely as long as it is not clear how Europe’s gas supply will continue.
___________________________________
Image sources: JMiks / Shutterstock.com
ttn-28