Exchange rate against the US dollar: Who benefits from the rising euro

Status: 01/26/2023 3:19 p.m

The euro is trading at its highest level against the dollar since April 2022. And there seems to be no end to the trend in sight. The resurgent euro is good news, at least for consumers.

By Angela Göpfert,

The European common currency will celebrate a small renaissance in 2023. It’s not even that long ago that one euro paid less than one dollar. In September last year, the European single currency marked its lowest level in 20 years at $0.9538.

It remained below dollar parity until the beginning of November. Since then, however, the euro has been able to catch up. The day before, the euro rose to $ 1.0929, the highest it has been since April 2022. Starting from the September low, this corresponds to an increase of more than 14 percent.

Euro soon at 1.10 or even 1.12 dollars?

An end to the upward movement does not yet appear in sight. Currency expert Antje Praefcke from Commerzbank is convinced that the euro could rise to $1.10 in the short term. But maybe there is more to it than that. From a technical perspective, the upward trend is intact, the first resistance can only be found at 1.12/1.13 dollars.

The resurgent euro-dollar exchange rate primarily reflects investors’ monetary policy expectations. From the market’s point of view, there are currently simply more arguments for a strong European Central Bank (ECB) and for a less aggressive Federal Reserve (Fed).

ECB plans further large rate hikes

The European Central Bank (ECB) remains credible in terms of its will to fight inflation, while the US Federal Reserve’s interest rate cycle may be slowing and coming to an end, says FX analyst Praefcke. “The ECB is still a long way from slowing down the pace of interest rate hikes,” DWS European economist Ulrike Kastens is also convinced.

Most recently, several ECB representatives spoke out in favor of further large interest rate hikes of 50 basis points at the meetings in February and March. Overall, the key euro interest rate should rise by 150 basis points by July, emphasizes market expert Robert Rethfeld from Wellenreiter-Invest with a view to the futures markets.

At the same time, according to the CME Group’s Fed Watch Tool, market participants only expect two small rate hikes of 0.25 percentage points each at the upcoming Fed meetings. The US Federal Reserve’s rate hike cycle should be complete in March. The first interest rate cuts are already being priced in for the fall.

Economic prospects brightened

The improved economic prospects in the currency area also speak in favor of the euro. Recently, there had been increasing signs that a recession in the current year would be very mild at best. At best, there is even a mini-growth in it.

“However, this in turn would argue for continued heightened inflation risks, partly due to second-round effects, and heightened vigilance by the ECB, which may have to continue its interest rate cycle further than currently signaled and priced in by the market. Accordingly, this would be a positive factor for the euro,” explains Praefcke.

What investors need to know now

However, the strong euro is a burden for German export companies, which are heavily weighted in the DAX, as it makes their goods more expensive in non-euro countries and thus worsens their competitive position. Thomas Gebert, inventor of the Gebert stock market indicator, therefore assumes that a strong euro/US dollar exchange rate is negative for the DAX.

The strong euro is also bad news for investors in the dollar area, as any price gains, for example with US stocks, are at least partially offset by the negative currency effects. On the other hand, investments in the euro area are becoming attractive for investors from the dollar area, for example.

Facilitation for tourists and motorists

Meanwhile, a stay in the USA is becoming significantly cheaper for business travelers and tourists from the euro zone. Consumers and companies that source goods and raw materials from non-euro areas can also breathe a sigh of relief. You now have to put fewer euros on the table.

Heating oil customers and drivers should also feel this positively. Because commodities like oil are traded in dollars. If the euro rises against the dollar, buyers in the euro area have to pay less for the same amount of oil or fuel under the same conditions. The bottom line is that the strong euro should also ensure a significant drop in imported inflation.

Falling gas price dampens inflation

In any case, experts expect inflation rates to fall sharply in the coming months. They also refer to the lower energy prices. For example, the European gas future TTF is currently quoted at around 60 euros per megawatt hour.

Although it is still twice as high as before the Ukraine war, it is also more than 80 percent below its high of 345 euros in the summer. “The ECB would be well advised to include the recent drop in prices on the European energy market in its deliberations,” market expert Rethfeld said

Does the ECB have to rethink now?

In addition, a statistical effect should become noticeable in the coming months: because in February and March 2022, very high month-on-month jumps in inflation were recorded at 0.9 and 2.5 percent. Wave rider expert Rethfeld therefore speaks of the “mother of all base effects” and a “high hurdle for all those who assume that inflation will continue to rise this year”.

However, if the inflation rate continues to fall, it is likely to make it much more difficult for the ECB monetary authorities to maintain their inflation narrative and continue their restrictive rate hikes as planned. So it’s quite possible that the euro has already completed most of its rise against the dollar.

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