2024-05-05 06:19:23
When the below-expected US employment data was released yesterday, indices on Wall Street rallied. Investor celebrations reflected expectations that as the labor market eases slightly (but remains strong) and inflationary pressures ease, the Federal Reserve will cut interest rates this summer.
Even if these estimates are confirmed, as the US economy has proven extremely resilient to high borrowing costs, it is not out of the question that we could see the US central bank limit itself to just one tapering this year. And this concerns us all. The movements in the interest rate policy have a direct impact on the exchange rates and especially on this one euro against him dollar.
The American economy is resilient, anemic growth in the Eurozone
In Europe the picture is not as bright as in the USA. THE UBS in its recent report it estimates that its GDP Eurozone it will grow by just 0.6% in 2024 (with downside risk, i.e. the possibility of an even lower performance), to recover to 1.2% in 2025 – a year in which inflation will also fall to the 2% target . On the contrary, the American economy expects growth of 2.3% this year and 1.4% next year.
What does this mean in practice for monetary policy? That the ECB will be forced into much deeper rate cuts by the Fed this year and next, putting the euro under strong pressure against the dollar. Already the single European currency has depreciated over 4% against the US since the beginning of the year, with the parity to $1.07 per euro.
More drastic interest rate cuts from the ECB
UBS estimates that the key US interest rate, currently set at range 5.25% to 5.50% it will be at 5% at the end of 2024, with larger declines coming in 2025, when the US economy will have slowed down. Even so, at the end of next year US interest rates will be at 3.25% – that is, one point higher than the Euro rates are expected to be.
UBS sees reduction of the deposit rate in the Eurozone by 75 basis points this year (three reductions of 25 basis points, as estimated by the governor of the Bank of Greece, Yannis Stournaras), in order to land at 3.25%.
He doesn’t see an additional reduction of 100 basis points in 2025, with the interest rate driven until the end of next year to 2.25%.
Support for tourism, exports and the trap
This means that the euro will remain throughout the next 12 months and maybe even longer at a disadvantage against the dollar“eating” the purchasing power of European households, but also offering with its devaluation support in two important sectors: tourism and exports.
But there is also a trap, into which Europe should be careful not to fall. The US is not at all happy about the continued appreciation of the dollar, knowing full well that a strong currency means weaker exports.
As the dollar strengthens, so will the voices that will ask a trade war with China (in the form of an increase in customs duties, etc.). If Europe is dragged into such a “war”, then it will see its economy take an even stronger hit.
Why a strong dollar is dangerous for the world
The 1:1 absolute parity scenario
Regardless of how the pros and cons of a cheap euro end up in the balance, the scenario of its absolute parity against the dollar (1:1) has come strongly to the fore and will likely become a reality within the next year.
It’s worth remembering that the last time we had absolute parity between the two currencies was in the third quarter of 2022. And then we had a divergence in interest rate policy, with the Fed raising rates earlier and more aggressively than the ECB, while we had the added factor of energy crisis in which the Eurozone had sunk to a much greater extent than the USA.