The euro has fallen to just over $1.04, its biggest low in five years. A year ago, the value of one euro was still equal to almost $1.22. Experts expect the two currencies to be equal in value this year.
The war between Russia and Ukraine was decisive for the fall of the euro, confirms Francesco Pesole, currency strategist at ING. He has seen the euro depreciate steadily against the dollar since late February, when Russia invaded neighboring Ukraine. The poor economic prospects for the eurozone as a result of rising energy prices also play a role, according to Pesole.
Rising energy prices are partly caused by the ongoing deadlock over gas supplies to Europe from Russia. European countries want to get rid of Russian gas, but do not yet have sufficient alternatives. The prospects for the European economy are bleak. That’s why the International Monetary Fund recently lowered its growth forecast for the eurozone to 2.8 percent this year.
Interest Policy
But there are also other causes, says ING economist Pesole. “Like the difference between the monetary policy of the ECB and that of the Federal Reserve.” The European Central Bank (ECB) faces the difficult task of, on the one hand, containing high inflation by raising interest rates, and, on the other, limiting the damage caused by this measure as much as possible. Particularly EU member states with large government debts, such as Italy, would suffer greatly because the interest on the government debt also rises as a result.
Next week, ECB President Christine Lagarde will speak on the issue. The central bank is expected to raise interest rates from July. It would be the first time in more than ten years that this has happened. Meanwhile, the US central bank umbrella Federal Reserve has already raised interest rates and is almost certain that more hikes will follow this year. As a result of this policy, the dollar remains strong and even appreciates in these turbulent times. There has been a rush on the dollar on the stock market, which is seen by many investors as a safe haven.
The devaluation of the euro against the dollar is not without consequences for the eurozone, says Pesole. ‘It has consequences for the current inflation within the EU. This is currently mainly caused by the import of products and services from the US. These have become more expensive for EU countries, which further increases inflationary pressure.’
Although the euro has fallen, it is not so much lagging behind other currencies. It mainly proves how strong the dollar is. The DXY, an index that charts the dollar against currencies of the US’s largest trading partners, reached a 20-year high in late April. Even against the Japanese yen, the dollar has reached an all-time high, a currency that is particularly resilient to economic turmoil.
Priced Increments
Whether raising interest rates by the ECB will save the euro, according to Pesole, simply depends on how much interest rates go up. ECB executive and president of the central bank of Austria Robert Holzmann told news site in early May Politico that interest rates must be raised three times this year, by at least 1.5 percent in total.
According to Pesole, that is not enough. ‘Those three interest rate hikes have already been fully priced in by the market.’ This means that companies already adjust their prices to the new interest rate, so that an increase has less or no effect. Pesole says the ECB should act more ‘hawkish’ (hawkish). This term is used to indicate that a central bank is taking drastic measures to combat inflation.
ING’s official forecast is that the euro will hold at $1.05 for the next six months. Pesole does point to the risks of market volatility, but is still soft in saying: ‘I don’t rule out the possibility that the euro and the dollar will reach an equal value this year.’