analysis
The euro is benefiting from the weakness of the dollar and now has a chance of rising further. Europe’s consumers can be happy – whether drivers or tourists.
The distribution of power on the foreign exchange markets has seemed clear since the summer: the dollar is showing strength, the euro is weakening. But the trend has now reversed and the euro is celebrating a small comeback.
While the European common currency fell to $1.0453 at the beginning of October, its lowest level since December last year, it has since staged a brilliant price rally. At the beginning of the week, the euro was trading at up to $1.0756 – the highest it has been in almost eight weeks. Within just a few weeks, the European currency has become more expensive by around three cents. The downward trend against the dollar that began in July has been broken.
Greater prosperity through a stronger euro
For consumers, the resurgent dollar is a good thing. For example, a stay in the USA will be significantly cheaper for business travelers and tourists from the euro area. Consumers and companies that purchase goods and raw materials from non-euro areas now have to put fewer euros on the table.
Heating oil customers and drivers should also feel this positively. Because raw materials such as oil are traded in dollars. If the euro rises against the dollar, buyers in the euro area will have to pay less for the same amount of oil or fuel, other things being equal. The bottom line is that the strong euro could also lead to a further decline in imported inflation. Cheaper imports and lower inflation increase prosperity.
Euro strength or dollar weakness?
But what are the reasons for the strengthening euro-dollar exchange rate? According to experts, the euro’s strength is primarily a dollar weakness. Commerzbank foreign exchange expert Antje Praefcke explains that a lot of positive things have already been priced into the dollar exchange rate. Its upside potential is therefore limited.
Fed probably at the end of theirs Interest rate hike cycle
In fact, the dollar can no longer expect any support, at least from monetary policy, and there are increasing signs of an interest rate peak in the USA. Following the Fed’s interest rate decision last week, expectations of further interest rate increases by the US Federal Reserve were priced out on the market bit by bit.
The sharp rise in bond yields is also playing into the hands of the monetary authorities: the yield on ten-year US government bonds recently rose above the five percent mark for the first time since 2007. In the fight against inflation, the Fed’s bond market has taken on work, as Fed Chairman Jerome Powell himself recently admitted. In addition, according to the latest data, the US labor market has cooled noticeably – this also takes the pressure off the Fed to further increase interest rates.
First US interest rate cut as early as May 2024?
“The Fed’s next step is likely to be a reduction in key interest rates, by the summer of next year at the latest, when the US economy has slipped into recession,” says Eckhard Schulte, CEO of asset manager MainSky Asset Management.
According to the CME Group’s Fed Watch Tool, the probability of maintaining the US key interest rate at the next Federal Reserve meeting on December 13th is over 90 percent. “What is new is that the futures markets expect a first key interest rate cut for the May 2024 meeting,” emphasizes market expert Robert Rethfeld from Wellenreiter-Invest. At the beginning of last week, June was still favored.
Chart technology on the side of the euro
From a technical perspective, there is currently a lot to be said for a falling dollar – and therefore for a rising euro-dollar exchange rate. The US dollar index, which calculates the value of the US currency in relation to a basket of currencies, has broken its upward trend. At the same time, the euro-dollar exchange rate has overcome its downward trend since the July high of 1.1275. The next serious resistance can now only be found at the level of the 200-day line at just over $1.08.
Gaza war as a risk factor
However, there are risks for the further development of the euro: recently there have been rather cautious signals from the economic front, especially the largest economy in the euro zone. Experts expect that after a decline in gross domestic product in the third quarter of the year, the German economy will probably also contract slightly in the fourth quarter and thus fall into a “technical recession”. The ECB’s interest rate increases are having an effect – this makes further interest rate increases by the ECB less likely.
Whether the euro can continue to rise against the dollar will likely be decided primarily in the Middle East. If the Gaza war escalates and spreads to other countries in the Middle East, “safe havens” like the US dollar would suddenly be in demand again.