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Global Economy

The curse of the weak euro

There is unrest at the headquarters of the European Central Bank (ECB). The euro falls and falls. This week it has fallen to a new 20-year low against the US dollar. Since the beginning of the year, the euro has lost a good 14 percent of its value against the dollar.

Will the euro remain permanently below parity?

Things could get worse soon. Several currency experts and investment strategists assume that the euro will be worth less than a dollar permanently. "Because of the looming energy crisis and the associated risk of recession, the price is likely to stay below par for quite a while," warns Jürgen Molnar, capital market strategist at RoboMarkets. "But there is always the possibility that the euro will fall even more sharply against the dollar." US banks like Morgan Stanley predict that the euro will stay at $0.99 until the end of the year.

Holidays are getting more expensive

German holidaymakers who travel to the USA are particularly affected by the weak euro. A trip to New York with a shopping spree on Fifth Avenue or a trip to Florida have become significantly more expensive.

Worse still, goods imported into Germany are becoming more expensive. German consumers may have to spend even more money, especially for refueling and heating. Because commodities like oil are traded in dollars. This was already painfully noticeable in the first half of the year: the price of oil rose by 21 percent in dollars and by a good 38 percent when calculated in euros. "The already expensive energy will become even more expensive due to the weak euro," fears financial expert Thomas Altmann from QC Partners.

Euro weakness fuels inflationary pressures

Capital market strategist Philipp Vorndran from asset manager Flossbach von Storch warns that the weak euro could further increase inflationary pressure. Consumers have to dig even deeper into their pockets to cover their living expenses.

Inflation could further shrink the assets of many Germans. Many investors have invested their money in investments that are quoted in euros.

Export economy in a dilemma

Even the German economy is hardly helped by the lower euro. It is true that exports of German goods become cheaper. On the other hand, companies have to buy energy and industrial raw materials more expensively. According to a comment by DZ Bank, the export advantage is currently being overcompensated by imported inflation. The weak euro is therefore "more of a curse than a blessing, as it fuels the already high inflation even further," say the bank's experts.

The capital market strategist Vorndran sees it similarly. In the short term, a weak euro is good, it improves the competitiveness of German and European companies. But that is only a short-term effect. In the long term, the weak currency will damage the competitiveness of the German export economy, he said on Tagesschau 24.

The logic in which a weak euro acts like an economic stimulus package for the German economy no longer works, says economist David Kohl from Julius Baer.

Interest rate differential and risk of recession benefits the dollar

There are currently two main reasons that are strengthening the dollar and weakening the euro: the interest rate differential between Europe and the USA and the war in Ukraine. The Fed has recently raised interest rates several times to between 2.25 and 2.5 percent. The European Central Bank (ECB), on the other hand, has only raised interest rates once by 0.5 percentage points.

The war in Ukraine has created chaos in the energy markets, with European countries in particular suffering. The gas shortage hits Europe harder than the USA. The euro zone and Germany could slip into recession in the second half of the year. In this respect, the weak euro is also a symbol of the impending risk of recession. And: Especially in times of crisis, safe havens are in demand. That is and remains the US dollar.

The Swiss franc also appreciated significantly against the euro

A second safe haven currency is the Swiss franc. The Swiss currency has appreciated by around eight percent against the euro since the beginning of the year. The European common currency fell to a record low and is now worth less than one franc. For a long time, the Swiss central bank SNB defended the CHF 1.08 mark with targeted interventions. Now, however, the currency watchdogs no longer see any reason for this. You fear imported inflation and heralded the turnaround in interest rates earlier than the ECB.

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