2023-07-27 07:44:56
It’s a movement that has received little attention so far, and yet… Slowly but surely, the euro is recovering against the dollar. Temporary phenomenon, or change of cycle? The answer will partly depend on the decisions taken by the American and European central banks. After the 0.25 point increase in its main key rate, announced by the Fed on the evening of Wednesday July 26, (it was raised to a range between 5.25 and 5.5%), the European Central Bank (ECB) meets Thursday 27 to announce its decision in turn – for all observers, the principle of an increase is accepted.
At this stage, the single European currency is certainly still a long way from its peak in the summer of 2008, at 1.60 dollars for 1 €. But after falling below the parity threshold with the greenback in July 2022, it finally rose above it in October of the same year: on that date, the fall in the price of gas warded off the specter of recession in Europe, and thus brings a breath of fresh air to the euro, which has gradually risen since, to trade in July 2023 against 1.12 dollars. And after ?
Dollar depreciation
One thing is sure, “the situation in which a euro is worth less than a dollar can only be exceptional because it does not correspond to the fundamentals of the European economy, analyzes Xavier Chapard, strategist at LBP AM. That being said, the trend over the past few months has been due more to a depreciation of the dollar than an appreciation of the euro. »
And for good reason, adds John Plassard, at Mirabaud. “The current level of the euro against the dollar is tied to market expectations that the US Federal Reserve will stop raising rates before the ECB,” because the United States reacted faster than Europe against inflation and could therefore afford to stop monetary tightening more quickly. As a result, higher rates on the Old Continent should attract capital to the European side of the Atlantic.
European degradation
However, from one economist to another, several scenarios are emerging: either the Fed and the ECB both raise their rates in July for the last time, remaining ready to resume the rise if inflation picks up again ; either the two central banks continue to hike rates beyond July; or the Fed takes a break after its July hike while the ECB continues to raise its rates in September, or even beyond. “In these last two cases, the depreciation of the dollar against the euro will be faster than at present, predicts John Plassard. Deciphering the speeches of Jerome Powell and Christine Lagarde, respectively at the helm of the Fed and the ECB, will provide a better idea of the scenario. »
For his part, Xavier Chapard foresees in any case that “the euro will gradually reach an exchange rate fluctuating around 1.15 or even 1.20 dollars, by next summer”. Analyst at IG France, Vincent Boy calculates for his part that the single currency will cap at a maximum of 1.15 for a dollar, but on two conditions: “If the ECB decides to raise its rates after the Fed, but also if the European economy avoids too much deterioration. »
Weight on competitiveness
This last condition is by no means obvious, on reading the latest indicators. ” I am expecting, continues Vincent Boy, that the European countries experience a sharp slowdown under the effect of monetary tightening by the ECB, which will make the euro zone and its currency less attractive. » In fact, the manufacturing production index in Europe has been in freefall, particularly since June. Below 50 in the euro zone, which in itself is a sign of a contraction, “it even fell to its lowest level in Germany in July, at 38, this is lower than its level in 2012 (43 at the time), at the height of the European debt crisis! »
In the meantime, what are the consequences of this higher euro on activity? ” Short term, answers Xavier Chapard, this helps to cope with inflation because a higher euro allows less to be imported.Consumers benefit from this, but in the longer term, this situation weighs on European competitiveness. »
The yuan too
A note from Saxo Bank warns: “It starts to become painful for the French fabric when the exchange rate reaches 1.16. But this is already penalizing some eurozone economies that are more subject to exchange rate fluctuations, such as Greece. »
This situation is all the more worrying as the euro is also appreciating against the currencies of emerging countries, in particular the Chinese yuan, the note continues. “It is unfortunately a completely neglected issue in political spheres. But we must understand that China is not just copying at low cost. It innovates to make its products more attractive, and it has succeeded in doing so in a record lapse of time in the niche of electric and hybrid vehicles where we Europeans were nevertheless convinced of having a decisive lead. »
Xavier Chapard shares this warning. “In terms of competitiveness, the exchange rate with China is at least as important as that with the United States. »
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