Published on Monday, October 30, 2023

Europe | Challenges for the euro

Since mid-July, the euro has depreciated by more than 5% against the dollar, even dropping to USD 1.04 at the beginning of the month. This drop is the result of a combination of circumstances that have had a significant impact on the currency in the second half of 2023 after a solid second quarter.

Key points

  • Key points:
  • One of the main factors pressuring the euro is the economic slowdown in Europe, mainly due to the weakness of the manufacturing sector, which continues to be affected by trade with Asia and by increases in the cost of intermediate goods.
  • At the same time, the U.S. dollar has been supported by the strength of the U.S. economic cycle, where consumption and employment appear to be holding up better than expected to restrictive monetary policy measures, and a recession that was previously predicted in early 2024 is likely to be avoided.
  • In addition, another determining factor has come into play in recent weeks: the conflict in the Middle East. Although it has not yet affected the euro, this situation mainly impacts Europe due to its energy dependence, and this can be seen in inflation and uncertainty regarding economic growth.
  • The interest rate differential, which is currently putting downward pressure on the value of the euro, should narrow in the coming months, leading to a slight appreciation of the currency, as the Fed is expected to begin its cycle of interest rate cuts by the middle of next year, while the European Central Bank (ECB) is not expected to do so until the latter part of 2024.

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