Tuesday , 21 May 2024
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Global Economy

Euro falls below dollar parity again

The euro has fallen below dollar parity for the first time since mid-July. Parity is a one-to-one exchange rate between two currencies. At 0.9988, the common currency was temporarily down as much as 0.5 percent, hitting its lowest level in five weeks.

The reason for the renewed weak signal from the euro is once again the interest rate policy of the US Federal Reserve (Fed). Many investors are currently expecting the Fed to hike interest rates again by 75 basis points on September 21st.

"Why delay rate hikes?"

Recently, relatively strong economic data from the USA had indicated that the US economy would remain robust. This increases the Fed's scope for sharp rate hikes. In general, higher interest rate hikes are expected in the US to fight high inflation than in the euro zone, giving the dollar an advantage when trading with the euro.

The head of the St. Louis branch of the Fed, James Bullard, spoke in the "Wall Street Journal" in favor of a 0.75 percentage point increase in key interest rates at the next meeting. The Federal Reserve (Fed) should continue to move quickly to an interest rate level that brings inflation down significantly, Bullard said: "I don't see why interest rate hikes should be delayed until next year."

The experts at Helaba pointed out that numerous representatives of the US Federal Reserve had recently unanimously spoken out in favor of further interest rate hikes – even if a recession were triggered.

European gas prices continue to rise

In addition to the Fed's monetary policy, the European energy crisis also plays an important role in the weakness of the common currency: fears of bottlenecks continue to drive gas prices up. The European future rose by more than ten percent to EUR 282.50 per megawatt hour. The Russian exporter Gazprom announced on Friday that it would again temporarily interrupt operations on the Nord Stream 1 pipeline at the end of the month for maintenance work.

Rising energy prices are fueling concerns that there could be a more serious economic downturn: it is the fear of a recession in Europe that – triggered by the energy crisis – is causing investors to shy away from investing in the euro. And the more severe the economic setback, the less chance the ECB has of raising interest rates sharply.

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