The British newspaper “Financial Times” published a report in which it talked about the weakness of the euro and concerns related to the economy in the euro zone, as the currency faces pressures as a result of economic challenges in the region, such as low economic growth and the accumulation of public debt.
The newspaper said, in its report translated by “Arabi 21,” that the euro’s response to the recent rise in interest rates this week reveals a lot about investors’ perspective on the world.
On Thursday, the inflation-focused European Central Bank raised deposit rates by a quarter of a percentage point to four percent, the highest point on record in the single currency’s history. According to the German Bank’s calculations, this cycle of rising interest rates stands out by longer historical standards.
In theory, the move was supposed to boost the value of the euro but that did not happen, as the value of the currency fell by 0.8 percent against the dollar that day, bringing it close to the level of $1.06 – its lowest level in three months. Thursday was one of the worst days for the common currency all year, as its value fell further, extending the euro’s losing streak now to nine consecutive weeks.
The newspaper reported that reminders by European Central Bank President Christine Lagarde in the press conference that followed the meeting that she was still willing to raise interest rates further were not enough to change course. “It’s not great when a central bank tightens policy only to see the value of its currency fall immediately after the decision,” Bas van Giffen, chief strategist at Rabobank, said in a note to clients.
Paul Donovan, chief economist at UBS Wealth Management, described the rise in interest rates as a “burden,” explaining, “Since most of the current inflation drivers in the euro area are not sensitive to interest rates, the inflationary impact of this rise in interest rates is questionable.” “The ECB President tried to take a tough stance in the press conference, but the markets ignored her tone.”
Some see another rate hike before the end of the year still a possibility – a possibility that some market watchers, including Rabobank’s Van Giffen, are taking seriously. But more broadly, some do believe the central bank will raise interest rates further, while the region’s economy feels pressures from the toughest policy yet and from the impact of weak Chinese demand on German manufacturing. It is clear that central bank staff have significantly reduced their forecasts for growth in the euro area, predicting growth of 0.7 percent for this year, compared to 0.9 percent previously, and lowering half a percentage point from next year’s forecast, to one percent.
For her part, Catherine Ness, chief European economist at BGIM Fixed Inc, warned that “the rise could tip the balance and risk causing a rapid economic slowdown and inflation below target in the medium term.”
This is not a great plan for euro bulls, if there ever is one. French bank BNP Paribas said it still likes to use the euro as a so-called financier – something it sells to fund more advantageous, higher-yielding bets elsewhere.
This rating is generally imposed on a currency only if its interest rates are stuck at or near zero, or even lower. Applying this term to a currency backed by the highest interest rates in history really underscores how the end of the era of low inflation has turned market mechanisms upside down.
A widening gap
The newspaper reported that the euro’s recent faltering also highlights another point, which is the widening gap between investors’ perceptions of the United States and the perceptions of investors almost everywhere else. But the euro’s weakness is not evident against other currencies and it has not made any progress against the pound or the yen since May. Instead, it is suffering particularly against the dollar, which continues to rise.
The US dollar index, which tracks its value against other currencies, has risen more than five percent since July, while US economic data raises the risks of a future recession more than ever.
The newspaper explained that the recent fluctuation of the euro represents another major signal that investors believe that Europe’s luck has run out. The incredible resilience of the eurozone economy that supported the currency and made the region’s stocks an unusually hot pick early this year is clearly fading.
According to Kate Jukes, a macro strategist at Société Générale in London, “Currency markets are never just about monetary policy, even if interest rates are usually the biggest driver of exchange rates in the short to medium term. But the depreciation of the euro due to… The ECB’s lower growth forecasts are something to watch.” “The euro could easily trade below $1.05 if we don’t get any positive surprises from real economic data in Europe soon,” Jukes added.
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2023-09-16 19:27:19
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