The euro: the policy of the European Central Bank will be decisive in maintaining it against the dollar

What are the factors that affect the price of the euro today?

In theory, currency reflects the economic value of a country or region. In Argentina, the economy is still doing very poorly, the peso is still very low and is experiencing a significant devaluation. On the contrary, in Switzerland, where there is real economic power and low inflation, the currency is also strong.

The Eurozone is currently facing several shocks that weaken its growth and contribute to the weakening of the currency. On the other hand, the war in Ukraine, with the question of heavy dependence on Russian gas, which amounted to 55% of Germany’s supply. On the other hand, the zero-Covid policy in China and the quarantine on its territory, will have an economic impact on the eurozone and lead to a sharp decrease in European and global exports to this country.

Was the weakness of the euro also explained by the policy of the European Central Bank?

Yeah. When you look at currency development, you also do so in relation to interest rates and, today, to the rate difference between the Eurozone and the US, as the Euro tends to approach parity with the Dollar. It was at $1,035 in mid-May. There is a lag in the Eurozone and a big difference today on both sides of the Atlantic – in favor of the Dollar – as the US Central Bank has already started the process of aggressively raising interest rates.

If the European Central Bank (ECB) in turn starts raising interest rates, it will push the euro almost mechanically. However, it does not seem to be convinced yet of the benefits of the increase to counter inflation, although it will eventually decide to do so from July.

Jean-Claude Trichet (former French president of the European Central Bank, 2003-2011, editor’s note) has been more closely associated with the strict limits of rate increases, the institution’s sole mandate. Incumbent President Christine Lagarde, a politician, is trying to get a consensus she does not have within the European Central Bank. It is certainly the first time that there has been such a strong consensus across the Atlantic, when the rhetoric is conflicting in Europe.

How can the euro develop the rest of the year?

If the ECB does not raise its rates, when it is expected to do so, we could have a very poor performance of the Euro against the Dollar and other currencies. So the euro could move towards parity with the dollar.

The dollar, like the Swiss franc, has become somewhat more expensive in recent months, playing the role of safe haven currencies, especially during periods of high political tension and great uncertainty. The euro has a shorter history and acts more as a diversification currency.

The value of the currency will also depend on the development of the war in Ukraine and its impact on the rest of Europe. The European Central Bank estimated at the end of April that high inflation was 50% due to energy prices, in connection with the war. And that raising its prices will not have an impact on the price of gas or a barrel of oil. A weak euro may facilitate higher prices in general. But if the next inflation numbers fall and the European Central Bank considers price peaks in the past, the arguments for a rate hike will not stand.

What are the consequences of a weak euro?

A weak euro is favorable for exporting companies, if they export outside the eurozone. In this case, France is one of the most exporting countries outside the region. But this is a problem for imported goods. Energy prices, for example, are more expensive. Meanwhile, do not keep track of wages. So driving and heating your car becomes more expensive. In addition, the price of wheat is also rising, with sanctions against Russia and a ban on Ukrainian exports, favoring an increase in the cost of bread.

Ultimately, there is an impact on consumption and growth. In the context of weak growth, the disadvantages of a weak euro on imported products outweigh the advantages of export goods. We are in a situation that resembles a worst-case scenario: a slowdown in growth accompanied by a rise in inflation.

For companies, high prices of imported goods that go into their production process affect margins. The automotive industry, distribution and construction sectors are particularly affected.

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