Published on Monday, August 8, 2022

Global | Headwinds for the euro

So far this year, the euro has depreciated by more than 10% against the dollar, weakening in mid-July to the level of parity between the two currencies for the first time since 2002.

Key points

  • Key points:
  • One of the most relevant factors playing against the euro, and which has set the tone since the beginning of the year, has been the different pace of normalization of the monetary policies of the respective central banks on the two sides of the Atlantic.
  • In response to high inflation, the Federal Reserve (Fed) began the rate hike cycle last March with a 25 basis point increase, followed by successive hikes of 50, 75, and finally another 75, bringing the benchmark rate to 2.25%/2.5%.
  • For its part, the European Central Bank (ECB), on July 21, after seven years with interest rates in negative territory, raised the three reference rates by 50 basis points, leaving the refinancing rate at 0.50%.
  • In addition, another determining factor has been the war in Ukraine. The energy shock it entails affects Europe relatively much more - due to its dependence on Russia - and does so both in terms of inflation and uncertainty about growth, while the United States is in a better relative position due to its lower energy dependence in general, and on Russia in particular.
  • As markets turn their focus beyond the potential recession in the old continent and the outlook for major risks becomes clearer, this euro weakness should begin to reverse, leading to a gradual appreciation of the currency against the dollar in 2023.

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