The depreciation of the euro, which also coincides with a similar plunge in the British pound, is due in part to macroeconomic factors. For example, there is currently a slowdown in business activity in the Eurozone as the region grapples with rising energy costs and inflation.
Euro’s decline could be bad news for the Netherlands
According to the Dutch newspaper De Telegraafthe fall of the euro could have profound ramifications for the Netherlands. About 70 per cent of the country’s exports are within the European Union and are therefore heavily dependent on the euro. On the other hand, other eurozone countries that export significant quantities of goods to the U.S. could benefit from the euro’s decline. This could happen because products destined for North America will be more easily purchased by Americans.
Another factor contributing to the growing disparity between the euro and the dollar is the difference in interest rate policies. According to the columnist and economist of De TelegraafEdin Mujagić, the European Central Bank is hesitant to raise interest rates. This is in stark contrast to its American counterpart, the Federal Reserve, which has raised rates and concluded a recent 75 basis point increase. “The dollar then becomes more attractive because you get more interest“, concludes Mujagić.
The depreciation of the euro implies that raw materials and energy products, including oil, will become even more expensive within the eurozone, as these products are traded in US dollars. In addition to this bleak development, the implication of a failing euro also suggests a rise in the price of products imported from the United States.
As the euro plunges to a 20-year low against the dollar, all eyes will be on the upcoming German economic releases. However, expectations suggest that the IFO business climate and GfK consumer confidence releases will be even weaker. In addition, the preliminary September inflation release may also add to price pressures, leading to further declines in the euro.
In addition to the euro, the British pound is also at its lowest level against the dollar
On Friday, the British pound fell to its lowest level in 37 years and is currently trading at 1 pound to 1.07 U.S. dollars. The drop comes even as the new British finance minister, Kwasi Kwarteng, announced stopgap measures to ease the burden of rising costs. These measures include tax cuts, as well as support measures for households and businesses. In addition, the British debt office has presented plans for 80 billion euros of additional debt issuance. This huge budget would be used to fund the finance ministry’s stimulus package.
UK bond yields also rose last week amid falling prices. For example, benchmark UK 10-year yields climbed to 3.829%, which has not been seen since April 2011. George Saravelos, global head of currency research at Deutsche Bank, commented:
“The market is sending very strong signals that it is no longer willing to fund the UK’s external deficit position in the current configuration of UK real yields and the exchange rate.”
In addition, George Saravelos also stated:
“The policy response required to what is happening is clear: a sharp rise in rates between Bank of England meetings from next week to regain credibility with the market. And, a strong signal that it is willing to do ‘whatever it takes’ to bring inflation down quickly and move real yields into positive territory.”