2024-08-25 23:33:26
At the highest level against the dollar since July 2023, the euro has “flew”. The euro’s benchmark exchange rate came within a breath of $1.20.
Market players tell Naftemboriki that the common European currency is recording an upward trend that suggests it may now remain permanently above the psychological barrier of $1.1.
But why is the euro gaining in value against the dollar? This is mainly due to interest rates. “To put it more simply: Free capital flows where they can be better invested,” the same sources tell “N” and explain: “Since the Fed has had the highest interest rates until now, more money has flowed into US bonds. But this is done in dollars. Higher demand for dollars caused their value to increase. The euro was declining accordingly. Since inflation rates in the US have now fallen more than in the Eurozone, the president of the Fed, Jerome Powell discounted that interest rates will start to come down from September gradually, this in turn allows free capital to flow more into euro bonds – demand for euros is rising and so is the euro exchange rate.’
The big beneficiary
The euro is currently the big beneficiary of the Fed’s expected rate cut and increased downside risks to the US economy,” said Geoff Yu, senior strategist at Bank of New York Mellon. “It is not an entirely positive story for the euro, as the current macroeconomic picture for Europe remains very weak.” The single currency’s gains may have more to do with its higher liquidity than a fundamental change in the eurozone’s economic outlook, he adds.
“This is more of a dollar weakness story than a euro strength story, because the fundamentals of the euro haven’t changed much,” said Stephen Jenn, CEO of Eurizon SLJ Capital.
Elias Haddad, senior market strategist at Brown Brothers Harriman, believes the euro will almost certainly limit its gains if the Fed eases monetary policy less aggressively than the ECB.
“We continue to believe that the divergence story remains and should continue to support the dollar,” Haddad said. “Markets are overly pessimistic about the US economy.”
The revenge of the euro: How it climbed to highs of the year, how beneficial is its appreciation
The eurozone is recovering
However, the European economy is already recovering. In the first two quarters of this year, euro area GDP grew by 0.3% compared to the previous quarter. According to forecasts in June by Eurosystem analysts, overall growth for 2024 should be around 0.9%. Undoubtedly, it is not a great rate, but it still represents an acceleration compared to 0.6% in 2023. The recovery should consolidate in 2025 and 2026 with growth in GDP of 1.4% and 1.6% respectively.
“However, some problems that emerged during the summer are a wake-up call about the fragility of the recovery and need to be watched carefully. To return to stable, sustainable and continuous growth, quick solutions must be found to the fact that the main drivers of growth – demographics and productivity – have stalled or are not moving at the desired speed,” market players emphasize. Confidence in the economic engine of the EU – Germany – has also fallen.
In any case, a stronger euro will help reduce inflation in the EU by making imports cheaper. Imports of oil, natural gas and other raw materials are mostly denominated in dollars. So when the dollar weakens, they become cheaper in euros. The rise of the euro in recent months has a lot to do with the milder winter in Europe. The warmer than normal weather also contributed to the reduction of natural gas prices.
“It doesn’t rain the same for everyone”
The saying that “it never rains for everyone’s taste” can also be applied to this scenario related to the forex market. And depending on the companies’ business model, the impact will be very different.
Thus, small companies that currently do not have the ability to sell abroad benefit from the fall of the dollar. Simply because most raw materials are bought in dollars, which reduces the bill for, for example, energy.
Likewise, businesses whose main foreign market is the European Union will not be affected by the behavior of the euro and the dollar. A stronger euro internationally would certainly provide us with greater freedom in EU decisions at the geopolitical level. An attractive currency also offers greater access to international financial markets, which in turn facilitates the financing of the large investments required for the digital and green transition.
On the other hand, a strong euro would also make exports more expensive, hurting the growth of exporting countries such as Germany.
In any case, the outlook for the euro will remain uncertain until the European economy emerges from the quagmire.