/ world today news/ The approaching increase in interest rates in the USA has a far greater influence on the exchange rate of the European currency against the dollar than the vicissitudes related to the Greek debt crisis.
On the global currency market, a decline in the exchange rate of the euro against the dollar has been observed in recent days. If on July 10 it was almost 1.12, today it decreased to 1.08. What is most surprising about this rapid downward movement is that it is occurring against the backdrop of successful attempts to prevent Greece from leaving the eurozone.
Forex is interested in the Fed’s plans
A very strong decline was registered on Monday, when the leaders of the eurozone reached an agreement in principle in Brussels on the provision of new financial aid to Greece. Last night the parliament in Athens approved the first package of reforms needed to release the money. However, this did not stop the sell-off in the euro, although shares in the European stock market rose on the background of this news, and quite seriously.
It turns out that the Forex market is either reacting negatively to attempts to keep the Greeks in the Eurozone, or reacting to completely different factors. The expert groups are practically unanimous in their opinion that the problem is not in Greece, but in the US Federal Reserve.
After seven years of anti-crisis policy, during which interest rates remained at zero, the US Fed is preparing to end the policy of ultra-cheap money and start raising interest rates to supply liquidity to the market.
It is this prospect that is currently driving exchange rates. At the same time, there is not so much a weakening of the euro as a strengthening of the dollar, after all, capital goes to where interest rates are higher and where their further growth is expected.
Rate hikes in September and December?
And these expectations were fueled precisely in those days, when the attention of the European public was completely riveted by what was happening in Greece. For this reason, some key statements made across the ocean went unnoticed. The wave of euro selling, or to be more precise, dollar buying, began on July 10 and continued until July 13, after Fed Director Janet Yellen told Congress that a rate hike this year would be appropriate at some point.
This was the signal that market participants were waiting for. Yesterday, reporting to Congress, Janet Yellen effectively repeated her statement that the time has come to normalize monetary policy. She made a rather optimistic assessment of the American economy. Its fortunes are stable enough to withstand rising credit prices, despite threats from Greece’s debt crisis and China’s stock market crash.
Literally a few hours later, John Williams, director of the Fed’s San Francisco branch, said directly: “September is a very good time for such an increase.” Moreover, he suggested that after the first step there could be a second one by the end of the year. It was these words that caused the euro rate to fall below 1.9 today. Market participants are now bracing for US interest rates to rise in both September and December.
The euro is moving towards parity with the dollar
And this means that the decline of the euro to levels of 1.08 and 1.09 is far from over. Let’s remember that in March they already gave less than 1.05 dollars for 1 euro, because they were expecting the interest rate hike already in June. But a number of important macroeconomic indicators then forced the Fed to be extremely cautious and postpone this step indefinitely.
As a result, the euro rate started to grow again and in May even crossed the 1.14 mark. At the same time, the US labor market and economy stabilized, and things again started to move towards a stronger dollar and a weaker euro. So it is not out of the question that we will see an exchange rate of 1 euro=1 dollar already this autumn.
It will all depend on when and how quickly the Fed starts raising interest rates. It is now the key factor in the global currency market. As for the situation in Greece, it will not influence exchange rates strongly enough, however paradoxical this may be.
The successes in bailing out Greece and today’s specific situation will rather lead to a weakening of the euro because they will reduce the global risks associated with this crisis. This will allow the Fed to raise rates at a faster pace.
The escalation of the Greek problems could force Janet Yellen to slow down the process of normalizing monetary policy. This will lead to a temporary weakening of the dollar and an increase in the exchange rate of the euro. But the main direction of movement in the world’s main currency pair is quite obvious: the euro will become cheaper. Which will make European exporters quite happy. /BGNES
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Andrey Gurkov, Deutsche Welle.
Berlin / Germany
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