The value of the euro against the dollar has risen again and many people will feel it, from those who heat with oil or drive cars with petrol engines. Some reduction in inflation can also be expected.
At the end of September, the common European currency reached its lowest value against the US dollar in the last 20 years and was traded at less than a dollar. In recent weeks, however, the euro has managed to recover around 10 percent of its value.
The strength of the euro is due to the weakness of the dollar
One of the main reasons for the strengthening of the euro is the weakness of the US dollar. In the United States, fears related to inflation, which unexpectedly dropped in October, are gradually easing. And this week, that was already evident in the decline in US consumer prices.
Due to this development, investors expect the US Federal Reserve to ease the pace of interest rate hikes. This, in turn, will reduce the demand for dollars, as their profitability for investors decreases as interest rates fall. “The lower interest rate makes the dollar less attractive,” said Commerzbank analyst Ulrich Leuchtmann.
But the sudden strength of the euro cannot be explained only by the weakness of the dollar. Part of the appreciation of the common European currency is due to developments in Europe. It is becoming increasingly clear that while the war in Ukraine and the energy crisis pose a serious burden on the economic situation in the Eurozone, a serious recession is not foreseeable. Even Germany, whose economy depends most on Russian gas, is likely to get away with fear alone.
The German economy is surprisingly resilient
There are a number of early indicators that point to this. For example, the barometer, with the help of which experts evaluate the development of the stock market over the next 6 months, jumped unexpectedly sharply (by 22.5 points) in November.
Jörg Zeuner, chief economist at the fund company Union Investment, says: “At the moment, we are convinced of how resilient the German economy is, despite the presence of many problems.”
If the recession in Germany and the Eurozone indeed turns out to be weaker than expected, that will also expand the ability of the European Central Bank (ECB) to use the interest rate tool to halt record inflation. And this, in turn, will make the euro even more attractive.
For citizens and businesses in the euro area, a strengthening euro is good news because it can reduce “imported inflation”. Recently, it was the weak euro and the correspondingly strong US dollar that caused the sharp rise in prices in the Eurozone.
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Companies have had to pay more for the goods and raw materials they import from countries outside the eurozone. And these higher prices were eventually fetched by the companies from the end users. In this sense, the appreciation of the euro now reduces this appreciation effect. And this will be felt by many people, including those who heat with oil, as well as car owners, because we are talking about commodities that are traded in dollars. When the euro appreciates against the US dollar, buyers in the euro area have to pay less for the same quantities of oil or gasoline, ceteris paribus.
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