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The euro is at parity with the dollar. Why it happened and what it means for the economy

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For the first time in 20 years, the euro has fallen to exactly one dollar. This was preceded by serious crisis phenomena in the European and American economies, and the change in exchange rates may be a consequence of a different response to the same crisis. 

Why is the Euro falling?

At the moment, the euro is one step away from parity with the dollar – it costs about $1.0005 on world markets. The rate of 1 dollar to 1 euro has in fact already been reached.

The reasons for this are to be looked for from both sides – from the weakening of the euro and from the strengthening of the dollar:

  • The dollar is rising on the back of the U.S. Federal Reserve’s tight monetary policy. The U.S. authorities are struggling with high inflation (it renews its highs every month), so the Fed is raising the interest rate at every next meeting. Higher interest rates make U.S. government securities more attractive to investors and this has a direct impact on the exchange rate. This is confirmed by the high value of the dollar index to other currencies (DXY);
  • The euro has no reason to strengthen. The European Central Bank’s key rate policy remains soft – currently at minus 0.5%. EU countries are waiting for the ECB to take steps to raise the rate in order to fight inflation, and the rate may reach 0.75% by the end of the year. But so far this is not happening; inflation in the Eurozone reaches 8.6% (just like in the US), and the European economy is suffering from high energy prices.

Simply put, the reason for near parity is that the U.S. Fed is fighting inflation harder than the ECB. But the U.S. government debt service will become much more expensive for U.S. authorities, while European countries can still avoid unnecessary spending.

Among the reasons, experts call the current balance of foreign trade: EU countries have a negative (deficit of up to 1 trillion Euros) while the U.S. has a surplus.

What will be the consequences?

Among the obvious consequences of the weakening of the euro for the eurozone countries is the continued fall of the currency, a further increase in inflation, which will affect the standard of living in EU countries. 

Experts predict the growth of tensions and economic problems in European countries:

  • Today, achieved currency parity will not cause any significant consequences for the European economy. A fall below parity will signal the inevitable consequences of the energy crisis and the inevitable recession in the Eurozone. For U.S. companies, the weak euro means difficulties and problems with competitiveness in European markets.
  • For European companies, a weak euro increases inflationary pressures through the rise in the cost of key imported raw materials for Eurozone companies. Theoretically, the weaker euro should be good for European exporters. At the same time, there are significant problems with energy supply in the Eurozone. This constrains the development of the investment potential of European industry for export. In addition, the weak euro reduces the attractiveness of assets denominated in European currency. As a result, investors will focus their investments in the United States.


Dollar hands back gains after Israeli strike; weekly gains likely

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on – The U.S. dollar handed back early gains Wednesday in volatile action, as traders digested the reported Israeli strikes against Iranian sites and the impact on risk appetite.

At 05:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 105.870, having earlier climbed as high as 106.190, just marginally below the five-month peak of 106.51 seen earlier in the week. 

Dollar hands back gains after Israeli strikes

The safe-haven dollar jumped higher earlier Friday following reports that Israel attacked Iran in an escalation of conflict in the Middle East, just a few days after Iran launched a drone strike on Israel.

This move marks a potential escalation in the Iran-Israel conflict, and could herald worsening geopolitical conditions in the Middle East, especially after initial reports showed strikes near locations holding Iranian nuclear facilities.

However, these gains have since dissipated after Iranian news agencies said there was no damage to the facilities, and the strikes have been seen to be rather limited in size. 

That said, the dollar is still likely to post a positive week as strong U.S. economic data and persistent inflation have prompted investors to drastically rethink the chances of the Federal Reserve cutting rates any time soon. 

A slew of hawkish comments from Fed officials have also helped the greenback, as evidenced by Atlanta Federal Reserve Bank President on Thursday saying that if inflation does not continue to move toward the U.S. central bank’s 2% goal, central bankers would need to consider an interest-rate hike.     

Sterling edges higher despite weak UK retail sales

In Europe, rose 0.1% to 1.0648, after fell less than expected in March, decreasing by 2.9% on the year, compared with a forecast 3.2% decline.

Additionally, Reuters reported the German government will raise its growth forecast for the German economy this year to 0.3%, from a previous forecast of 0.2%.

However, any euro strength may well be temporary with the now expected to cut interest rates before the Federal Reserve in an attempt to give the region’s struggling economies a boost.

climbed 0.1% higher to 1.2445, trading just above five-month lows despite British stagnating in March.

Sales volumes showed no growth last month, below the expected 0.3% increase, representing the first time that they have not grown in monthly terms since December.

Weakness in retail spending makes it more likely the will start cutting interest rates in the summer, probably before the Federal Reserve.

Yen boosted by safe-haven status

In Asia, traded 0.1% lower at 154.47, with the safe-haven yen boosted by the elevated tensions in the Middle East. 

The Japanese currency remained near 34-year lows, prompting caution over possible government intervention.

edged 0.1% higher to 7.2417, with the yuan near five-month highs amid uncertainty over the Chinese economy.

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Japan’s finance minister gives fresh warning on excessive yen moves

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WASHINGTON (Reuters) – Japanese Finance Minister Shunichi Suzuki said on Friday authorities would take appropriate action against excessive currency market moves, repeating his warning to investors against pushing down the yen too much.

There has been growing market interest in the timing and pace of a pivot by the U.S. and European central banks toward less restrictive monetary policy, Suzuki said.

“Uncertainty and market speculation over these developments have heightened volatility in financial markets, including foreign exchange markets,” Suzuki said in a statement to the International Monetary Fund’s steering committee.

“It is important that foreign exchange rates move stably, reflecting fundamentals, and excessive volatility is not desirable. We would take appropriate actions against excessive movements,” he said during the spring meetings of the International Monetary Fund and World Bank in Washington.

© Reuters. FILE PHOTO: Japanese Finance Minister Shunichi Suzuki speaks during an event about expanding health coverage for all during the IMF and World Bank’s 2024 annual Spring Meetings in Washington, U.S., April 18, 2024. REUTERS/Ken Cedeno/File Photo

A broad dollar rally driven by receding market expectations of a near-term U.S. interest rate cut has recently pushed the yen to a 34-year low, heightening the chance of currency intervention by Japanese authorities.

The U.S., Japan and South Korea agreed to “consult closely” on foreign exchange markets in their first trilateral finance dialogue on Wednesday, acknowledging concerns from Tokyo and Seoul over their currencies’ recent sharp declines.

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BofA lowers EURUSD year-end forecast to 1.12 amid Fed policy shift

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On Friday, Bank of America (BofA) revised its forecast for the currency pair, now expecting it to reach 1.12 by the end of the year, down from the previously anticipated 1.15.

The adjustment follows a change in the Federal Reserve’s interest rate policy, with the first cut now expected in December rather than June. BofA cited potential risks from the absence of Fed cuts and fluctuating oil prices.

The firm also highlighted the impact of escalating geopolitical tensions, rising oil prices, and persistently high U.S. interest rates on emerging markets (EM). These factors have been identified as significant challenges, prompting BofA to revise its forecasts for the exchange rate as well.

The bank now predicts the USD/JPY will climb to 155 by the end of 2024 and 147 by the end of 2025, which is an upward revision based on the latest Federal Reserve forecast adjustments.

BofA has also shifted its stance on the USD/JPY from a slightly short position to buying, indicating a change in their trading strategy. The firm noted that most of their positions are light, suggesting a cautious approach to currency trading at the moment.

In the broader context of currency market dynamics, BofA stated that a stronger U.S. dollar would likely depend more on real money movements rather than speculative trades. This perspective takes into account the actual flow of funds by institutional investors as opposed to short-term bets made by traders.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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