The gap between the euro and the dollar continues to narrow. The single European currency has registered a decrease of almost 1% throughout this week and is already exchanged for 1.05 greenbacks, which places it at the lowest point since the beginning of the year. The trend suggests that the parity scenario of the summer of 2022, when a euro became worth the same as a dollar, could be repeated in the coming months, according to several analysts. The strength of the US economy – which recorded 2.1% growth in the second quarter of the year, according to the Department of Commerce –, added to the solid employment and consumption figures, continues to boost the dollar against the rest of the currencies of the market. On the other hand, the possibility of recession for the euro zone economy keeps investors expectant about the evolution of activity in the Old Continent while they wait to see if the European Central Bank (ECB) makes a move or stops rate increases.
The evolution of monetary policies on both sides of the Atlantic has been the main argument of the struggle between the two currencies since the recovery after the pandemic. The euro began to accelerate its fall after the Federal Reserve, despite keeping interest rates intact, did not rule out a new increase in the remainder of the year to quell inflation. In the country where the dollar is printed, the price of money is in the range of 5.25% – 5.5%, a maximum that has not been reached in the last 20 years. The entity led by Jerome Powell expects rates to remain high for longer than previously estimated. The decision has encouraged investors, who see how the Fed could manage to reduce inflation levels without destabilizing the labor market, which in economic jargon is known as a “soft landing.”
On the other hand, the ECB, led by the French Christine Lagarde, raised interest rates by a quarter of a point to 4.5%, the highest level since 2001. Which continues to punish the economy of the bloc whose industrial activity and Trade has begun to contract, according to the PMI index, which measures the health of the private sector through surveys of companies. The Organization for Economic Cooperation and Development (OECD) estimates that euro zone activity will barely grow by 0.6% this year and 1.1% in 2024. From Brussels they are slightly more optimistic, approximating the growth of the EU by 0.8% this year. The German economy is bearing the brunt, which will contract by 0.4% this year, according to the European Commission report.
Jorge Labarta, founder of the currency risk manager Quant, believes that the ECB is concentrating on reducing inflation, but that the market is realizing that it will be at the cost of causing serious damage to the EU economy. “This is not happening in the United States, where the economy is doing much better comparatively and has fewer structural problems than the community bloc. The North American market understands that the rate reduction may be progressive and not at the cost of harming the country’s economy,” says Labarta, who also contemplates that rates will remain high for several months.
In theory, aggressive monetary policy pushes up the value of a currency because government and corporate bonds become more attractive, enticing more investors seeking higher yields. However, in the current scenario other variables must be included. For Labarta, it is important to consider that in the current episode of inflation, the United States remains more protected because it has a greater capacity to be self-sufficient. “The energy produced by the United States has increased in price, which has resulted in higher incomes. While here we are paying all the extra cost to other countries outside the bloc,” Labarta explained.
In the eurozone, inflation fell to 4.3% in September. This is the lowest level in two years, which takes pressure off the ECB ahead of its October meeting. The bloc also faces new increases in fuel prices caused by cuts from Russia and Saudi Arabia; which adds to the difficulties that the ECB must face to return to the old continent and its currency into the growth lane.
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