How much a rate cut could endanger the euro

The ECB had raised interest rates at a rapid pace – the monetary authorities could soon loosen monetary policy again. This could weaken the euro. What would that mean for the economy and consumers?

A counter with a glass window, a handover table with a lever: put cash in, get the value back in another currency – that’s how business works in an exchange office. Holidaymakers and business travelers are no longer as dependent on cash as they used to be. Many payments are digital. The currencies are still converted, depending on the exchange rate.

There is currently just under 1.08 dollars for one euro. Soon it could be less – namely if the European Central Bank lowers interest rates, explains Antje Praefcke from Commerzbank: “Low interest rates actually mean a weaker currency as an initial reaction.” The value of the euro could weaken further, says Praefcke. The foreign exchange expert expects the exchange rate to move towards a mark of 1.04 dollars.

Inflation in the USA remains stubborn

There is a simple principle behind this: Investors put their money where there are higher interest rates. In this case, for example, to the USA. It will probably take longer there than in the euro zone for central bankers to ease interest rates. This is because inflation in the USA is more stubborn: While inflation in the Eurozone has recently approached the target of two percent, in the USA it has actually increased again – to 3.5 percent in March.

Birgit Henseler from DZ Bank attributes this to the strong economy in the USA: “Overall, the unemployment rate remains very low in the United States. And that of course supports consumption.” According to Henseler, companies have the opportunity to further increase prices in this environment. Surveys show that companies will also implement this.

Fed waits to cut interest rates

The monetary authorities at the US Federal Reserve see the danger that inflation will rise again if they loosen interest rates too early. Henseler from DZ Bank expects inflation in the USA to slowly decline in the coming months. However, the hope that the Fed would be able to reduce interest rates rapidly did not come true.

It now seems certain that the European Central Bank will loosen interest rates first. A first step downwards is likely to take place at the upcoming ECB meeting at the beginning of June. In the USA, on the other hand, the first interest rate cut is not expected until the end of the year. Could this affect the euro more than expected? Analyst Praefcke from Commerzbank doesn’t expect any big surprises: “The market is very forward-looking. At the moment it has actually already priced in these interest rate steps – that is, one in June for the ECB and at least one for the US Federal Reserve towards the end of the year. “

Exports are cheaper, imports are more expensive

This is particularly important for companies that export their goods abroad. If the euro loses value against other currencies, their goods become more affordable. Consumers from the Eurozone, however, have little to benefit from this. Not only would they then be able to afford less abroad; Imported products – from coffee to electrical appliances – could also become more expensive in Europe.