Sep 09, 2022 Macro

About the stronger than expected euro

When comparing the euro against other G10 currencies the picture is not as dark as some might think.

Finally, in August 2022, the euro fell below parity to the U.S. dollar. Hence Europe's common currency is now trading as low as it last did in 2002.[1] In times of high, probably soon to be double-digit inflation rates, this is of course a particularly unwelcome development.

The reasons for the euro's weakness seem obvious. Put very simply, money flows into currencies where the highest (real) interest rates can be earned. The U.S. central bank (Fed) started raising its policy rates much earlier than the ECB. This has increased the interest rate advantage of the U.S. dollar against the euro. In addition, Russia's invasion of Ukraine is having a much greater economic impact on the Eurozone, not least because of the continent's high dependence on Russian energy. Another argument in favor of the U.S. dollar is the fact that in recent years the dollar has established itself as a safe haven in times of falling prices on global financial markets. Therefore, this year’s negative performance has provided additional support for the dollar.

Development against the U.S. dollar in August 2022*

20220909_CotW_EUR Exchange Rate_CHART_EN.png

* 7/29-8/31/22; USD=U.S. Dollar, EUR=Euro, AUD=Australian Dollar, NZD=New Zealand Dollar, CAD=Canadian Dollar, CHF=Swiss Franc, NOK=Norwegian Krone, JPY=Japanese Yen, GBP=British Pound, SEK=Swedish Krona

Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 8/31/22

Summing up, there are a number of reasons why the euro has weakened that much. At least when looking at the U.S. dollar as a reference. A somewhat more differentiated picture emerges when looking at the euro exchange rate in comparison to other industrialized currencies, as our "Chart of the Week" demonstrates. Among the G10 currencies, the euro has been roughly in the middle since the beginning of the year. In August, the euro even ranked second after the U.S. dollar as the strongest G10 currency. The so-called commodity currencies, such as the Australian dollar, lost more ground than the euro. The Japanese yen, the British pound and the Swedish krona were particularly weak.

Looking ahead, over the next few weeks there seems little to suggest a trend reversal in the exchange rate of the euro against the U.S. dollar. On a 12-month horizon, however, Dr. Xueming Song, currency strategist at DWS, expects the euro to strengthen again.

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1. Bloomberg Finance L.P., as of 9//6/22

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