The US interest rate hike is a windfall for Europe: the euro is gaining ground.
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After the announcement of the historic rate hike by the Federal Reserve, currency traders sold the dollar. Fed Chair Jerome Powell has dashed hopes that the Fed would pick up the pace at which interest rates rise. Increases of 0.75 percentage points will not be considered, Powell said. Speculators who had bet on such an acceleration reduced their positions.
The declining dollar meant that the euro regained ground. The European single currency had lost significant value in recent weeks, as the ECB is much less active in fighting inflation than its US counterpart. A few hours after the decision, the euro had already gained 1 percent in value. In theory, this is good news for European consumers. Import of oil, for example, is slightly less expensive. However, the question remains how long the price gain will last. Moreover, currency movements are overshadowed by the volatile commodity market. The oil price in Europe rose by 5 percent yesterday due to the announcement by the European Commission about the phasing out of Russian oil imports.
Stagnant economy
A Bloomberg index that charts the dollar against a basket of global currencies saw its biggest drop since March 9 in recent hours. Against the dollar, the Russian ruble gained 7 percent and the South African rand 2 percent. The British pound gained more than 1 percent in value. That was slightly more than the euro, which gained 0.73 percent at 8 a.m. against its pre-Fed rate.
The extent to which the ECB will follow the American example and start raising interest rates remains a question mark. In an interview with the Italian newspaper The print ECB director Fabio Panetta said the eurozone economy is “de facto stagnating”. Without some one-off windfalls in some member states, there would have been no growth in the first quarter, he claims. “Growth momentum in Germany is low, and has been weakening since the outbreak of the war.” Slowing growth and the threat of recession are considerations that the ECB takes into account when deciding on the stimulus program and interest rates.
Today, the Bank of England will also decide on an interest rate hike. Interest rates are expected to rise for the fourth time by 0.25 percentage points, to 1.00 percent. That is the highest level since the financial crisis.
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