Deutsche Welle: Why is the euro falling?

The joint European currency was being traded up to $11,000 on Tuesday a rapid slide from the $1.15 level before Russia began the war in Ukraine. The sharp decline has brought the euro close to achieving equality with the US dollar for the first time since the end of 2002.

Why is the euro falling?

The overall deterioration of the eurozone perspective amid rising gas prices and fears that Russia will cut natural gas supplies is dragging the common currency. Great support of large economies such as Germany and Italy from Russian gas has left investors nervous, with economists predicting a much faster and more painful recession in the euro area than in the US.

This adds to the difference in US and eurozone interest rates. The US Federal Reserve has aggressively raised interest rates to reduce inflation, while the European Central Bank (BQE) has so far resisted steep increases.

The US interest Norma is expected to range by 3% against 1% in Europe. So the money will go to the country with a higher productivity”, DW Carsten Brzeski, chief economist for Germany and Austria in ING, told the DW Carsten Brzeski.

The American dollar is also taking advantage of his safe haven withdrawal. Amid all the darkness, condemnation and uncertainty about the global economy, investors are being comforted by the relative security the dollar offers being less exposed to some of the major global dangers now.

What is dollar equality, and why is it a big deal for the euro?

Equality basically means $1 buys $1. It is nothing more than a psychological threshold for market participants who are known for their love of round pictures.

The financial markets always want to find a sort of symbolic meaning”, Brzeski said.

Veray Patel, a currency exchange strategy at Vanda Research, said the level of equality could be a point at which the euro bull and bear close horns to determine which direction the currency goes from there. (A “dem” under definition is an investor buying shares because they believe the market will increase; while a “ari” will sell shares because they believe the market will turn negative. )

The last “, we are beginning to see investors betting the euro that falls below equality. But you can imagine the same way that more investors will start buying Euros as we approach that level,” he told DW.

How does a weaker euro affect consumers?

One euro on the slide would add burden to European families and businesses that are already wavering from record inflation. A weaker currency would make imports more expensive, which is largely expressed in dollars. When these articles are raw materials or intermediate goods, their higher costs could further increase local prices.

In normal times, a weak currency is seen as good news for exporters and heavy economies from exports like Germany, because it increases exports by making them cheaper in dollars terms. But then these are not normal times thanks to the global friction of the supply chain, sanctions and war in Ukraine.

“in the current situation with geopolitical tensions, I think the benefits from a weak currency are smaller than the disadvantages”, Brzeski said.

However, for American travelers who go to Europe this summer, a weak euro is a blessing. For example, at the level of equality, they will theoretically be able to exchange $11,000 per 1,000 instead of less than $900 in February. In other words, their dollar would be worth a lot more. For businesses importing European goods, things would be cheaper in dollars terms.

Where's the end of the euro?

Bets that the euro will continue its fall below equality have increased in recent days as the energy crisis in Europe deteriorates.

“Euro is being traded as if a crisis in Europe is on the doorstep. So, you have to see more bad news now about all the gas and potentially geopolitical supplies that the euro will be weakened beyond equality”, Patel said.

Nomura International's courts predict that the euro could fall to $0.95. Deutsche Bank's currency exchange research head, George Saravelos, has a similar prediction. A “movement down to $0.95-$0.97 would coincide with the extremes of all time in exchange courses since the end of Bretton Woods in 1971”, he wrote in a note of 6 July to customers.

What does a weaker euro mean for ECB?

A weak euro and additional inflation it brings adds to the BEC's challenges, which is already under surveillance for slowing blocks in the fight against inflation.

To make things worse for the central bank that has the mandate to reduce inflation, the euro has not only weakened against the dollar, but also the other coins as Swiss francs and Japanese yen.

“This is now beginning to become a broader weakness of the euro, and therefore becomes more an inflation problem for ECE”, Patel said.

The ECB aims to raise the basic interest rates by 25 basic points next week, its first growth in over 10 years.

“A weaker euro supports the view of a more aggressive rate increase”, Brzeski said. The argument after that would be that if we went to an increase of 50 basic points next week, rather than 25, this could immediately stop the euro drop because it would surprise financial markets”.

However, some experts say an economic downturn would put the bank in a tighten, preventing it from any aggressive tightening of monetary policy. That, in turn, would ensure that eurozone interest rates remain repressed against the US. Such expectation is already playing a role in the euro's fall.