author丨Wu Bin
editor丨Hejia
picture source丨Picture insect
The weak euro "keeps falling."
Under the impact of factors such as the energy crisis, concerns about economic recession in Europe are increasing day by day. Investors have also reduced their bets on the European Central Bank interest rate hike, and the gap between European and American monetary policies has widened. Dragged down by negative factors, the euro has fallen to a 20-year low, hovering near the 1.02 mark on July 6.
At the same time, as the euro continued to fall, the U.S. dollar index hit its highest level since 2002. In the composition of the US dollar index, the weight of is 57.6% for the euro, 13.6% for the yen, 11.9% for the pound, 9.1% for the Canadian dollar, 74.2% for Swedish krona, and 73.6% for Swiss franc.
Debon Securities Chief Economist Lu Zhe analyzed to 21 Century Economic Report reporter that the weakness of the euro mainly comes from the widening difference in economic expectations between Europe and the United States. The United States is going from overheating to recession, and Europe is going from recovery directly to recession. This will undermine the European Central Bank's confidence to raise interest rates. The euro is the largest component of the U.S. dollar index, and a sharp fall in the former will inevitably lead to a sharp rise in the latter. The future prospects of
are still not optimistic. Where will the weak euro go?
Why the euro keeps falling
It should be noted that the euro's decline has been formed since the middle of last year. The divergence of European and American economic and monetary policies has caused the euro to continue to fall.
Cao Hongyu, a researcher at the Bank of China Research Institute, told a reporter from the 21st Century Business Herald that the divergence between the euro and the U.S. dollar is closely related to the differentiation of the monetary policies of the European Central Bank and the Federal Reserve. The reason behind this lies in the recent sharp slowdown in European economic growth momentum. Affected by the situation in Ukraine, Germany experienced its first trade deficit in more than 30 years in May. The comprehensive PMI of major euro zone economies such as France and Spain has continued to decline for many months. Companies are facing soaring import and production costs and weak product demand. situation, the economic outlook for the Eurozone has become bleak, and recession expectations have risen.
This year alone, the exchange rate of the euro against the US dollar has fallen by about 10%. Record inflation has intensified the pressure on households and businesses, and the knock-on effects of the Russia-Ukraine conflict have intensified the risk of recession in Europe and hindered the European Central Bank from quickly raising interest rates.
The current money market has reduced bets on the extent of the European Central Bank's interest rate hikes this year to less than 140 basis points, far lower than more than 190 basis points three weeks ago. The interest rate gap between the European Central Bank and the Federal Reserve has widened. In terms of economic data, data released on July 5 showed that the final Eurozone comprehensive PMI fell to 52 in June from 54.8 in May, a 16-month low. Chris Williamson, chief business economist of S&P Global Market Intelligence, commented: "The growth rate of business activity in the euro area has deteriorated sharply, and the risk of falling into recession in the third quarter is increasing."
Joe, senior analyst at GAIN Capital Group Perry analyzed to a reporter from the 21st Century Business Herald that the PMI data changed the market theme from inflation concerns to recession concerns. PMIs in many countries in the Eurozone were lower than expected, fueling fears that a recession is imminent. Not only is inflation soaring in the euro zone, but economic growth is also slowing, leaving the European Central Bank in a dilemma.
According to Lu Zhe, the probability that the three major driving forces that stimulated the economy from recovery to overheating in the early stage: loose money, fiscal stimulus, and endogenous economic growth will switch to reverse suppression in the future is rapidly increasing. The recession expectations traded in the market are based on the knowledge that the time is unknown but the probability of occurrence is very high.
Similarly, Morgan Stanley economist Jens Eisenschmidt also warned that as Europe imports less natural gas from Russia and consumer and business confidence indicators continue to decline amid high inflation, the euro zone will The economic outlook has weakened sharply. The Eurozone economy is expected to fall into a slight recession in the fourth quarter, and the entire recession may last two quarters. Then, driven by increased investment, it will return to growth in the second quarter of next year.
This series of unfavorable factors is continuing to drag down the performance of the euro. Perry told reporters that the euro/dollar has been falling since May 2021, and the downward trend has lasted more than a year. Investors worry that the European Central Bank will not do enough to help the European economy stave off high inflation. This is also true.In the year starting in May 2021, euro area inflation continued to rise, most recently reaching a record high of 8.6% in June 2022. The European Central Bank's 25 basis point interest rate hike in July was too late and may not have been strong enough.
The possibility of the euro falling below parity with the US dollar increases
For the future, European economic and monetary policies will become the key to determining the trend of the euro. Unfortunately, the market is not optimistic about what's to come.
Compared with the United States, Europe is at greater risk of falling into stagflation. Data released by Eurostat on July 1 showed that the inflation rate in the Eurozone soared 8.6% year-on-year in June, exceeding the 8.1% in May and hitting the highest level since 1997. Among them, energy prices in the Eurozone soared by 41.9%.
Peter Praet, the former chief economist of the European Central Bank, said that Europe is likely to be about to fall into a situation of soaring prices and economic weakness. "Many situations are intertwined, and Europe will definitely fall into a particularly difficult financial and economic situation. There is a high probability that Europe will eventually fall into stagflation. This is the worst possible scenario."
This has also been echoed by current officials, Europe Philip Lane, the central bank's chief economist, said vigilance was needed in the coming months. "Because there is uncertainty, we have to manage both risks: on the one hand, the risk that inflation will be higher than expected for a longer period of time; on the other hand, we do face the risk of an economic slowdown, which will also reduce inflationary pressures. .”
The important reason behind this is the Russia-Ukraine conflict, and the energy crisis has sounded the alarm throughout the European continent. Deutsche Bank believes that European economies are facing a new wave of major shocks from a slowdown in Russian natural gas supplies, which could push inflation higher than the current record figures and put the continent's economic powerhouses at risk. Germany is on the verge of recession.
In comparison, the U.S. economy has been less affected by the Russia-Ukraine conflict, and the Federal Reserve's monetary policy tightening pace is much faster than that of the European Central Bank. From the beginning of 2022 to the present, the Federal Reserve has raised interest rates by a cumulative 150 basis points, while the European Central Bank did not raise interest rates until late July. The first rate hike will be initiated. Cao Hongyu told reporters that compared with the Federal Reserve, the European Central Bank faces a more complex policy environment. In addition to paying attention to the trend of the core indicator of inflation, it also needs to consider the impact of raising interest rates on different internal members and their reactions, which limits the flexibility of decision-making. In the next few months, the interest rate differential between the United States and Europe will maintain a large gap or even expand further, and the euro's exchange rate will continue to be under pressure.
Valentin Marinov, foreign exchange strategist at Credit Agricole , believes that the U.S. dollar continues to benefit from its role as a high-yield safe haven, and the U.S. economy is not considered to be involved in the energy crisis for the time being. This allows the Federal Reserve to persist in tightening monetary policy and increases the attractiveness of the dollar.
At the official level, a study released by the Federal Reserve Bank of New York shows that despite challenges posed by geopolitics and digital currencies and other technologies, the U.S. dollar’s dominant international status has not been challenged. "Whether it is used for trade, investment or as the global reserve currency , the U.S. dollar's international status is still quite strong, and it is unlikely to have competitors in the short term."
Thanks to its global reserve currency status, the U.S. dollar is generally regarded as a good safe-haven assets. During times of market turmoil, traders tend to seek U.S. dollar liquidity while selling riskier investments, and the U.S. dollar's safe-haven status continues to attract inflows.
Overall, against the backdrop of a weak European economy and dovish tightening by the European Central Bank, more and more people are predicting that EUR/USD will fall below parity. The option pricing model shows that the current probability that the euro will fall to parity with the US dollar by the end of the year is about 60%, which is higher than the 46% on July 4.
Dominic Bunning, head of European foreign exchange research at HSBC , analyzed that while other central banks were raising interest rates at a faster pace, the European Central Bank still adhered to its position and only raised interest rates by 25 basis points in July and had to wait until September. Accelerate the pace of austerity. He expects the euro to reach parity with the dollar this year.
Perry also told reporters that the euro/dollar may fall below parity in the future, and the last time it fell below 1.0000 was back in December 2002.The situation in the United States is somewhat similar to that in the Eurozone, but the situation of the Federal Reserve is much better than that of the European Central Bank. The main reason why the Federal Reserve was able to raise interest rates quickly was that the U.S. economy was performing relatively well, and the unemployment rate of 3.6% was also quite strong.
The euro may continue to weaken in the future. Lu Zhe predicts that even if the European Central Bank starts an interest rate hike cycle and narrows the gap between European and American policy expectations, it will be difficult to offset the negative impact on the euro caused by the widening gap between European and American economic expectations. Euro/ It is only a matter of time before the U.S. dollar becomes parity.
Editor of this issue Jiang Peipei Intern Li Kailin
