When activity resumed on the financial markets on Monday, the dollar resumed its ascent once morest the euro, with the greenback approaching less than one cent of parity once morest the single European currency. For observers, this balance is only a matter of days, or even hours. the Chief Economist of BNP Paribas Fortis, Koen De Leus, however, is not overly concerned.
1. Is a weak euro an advantage?
“From my point of view”explique Koen De Leus, “it is not the euro which is weak, but the dollar which is strong. The American currency is currently carried by a series of factors. The risk of recession is greater in Europe than in the United States, which causes the high volatility of the financial markets in general. Investors are therefore clearly looking for safe havens. This is why they go to the dollar, which makes it rise. But this is also the case for the franc Switzerland. Compared to other currencies, the euro retains its status as a solid value and maintains a certain stability. Regarding the advantages and disadvantages of a lower euro once morest the dollar, it should be remembered that a cheaper euro is an asset for European exporting companies. The current situation is very complex, however. It should also be remembered that the strength of the dollar is causing an import effect of inflation. This is especially the case for imports of gas and oil, even if crude prices have weakened a little c the last days”.
2. What role do interest rates play?
Another factor playing in favor of an appreciation of the dollar is the level of interest rates in the United States. “Indeed. And the employment figures released on Friday might comfort the US Federal Reserve in its view of rapidly raising short-term rates. There is talk of a further 0.75% hike in the benchmark rate, so it would be a second very significant tightening, on a scale that has not been observed for decades. This obviously causes an influx of capital into the dollar since the rate differential makes it more attractive. The Fed’s objective being, as we know, to cause a slowdown in the economy and thus influence the level of inflation downwards”analysis Koen De Leus.
3. The ECB forced to act, quickly and strongly
Is the yield differential favorable to the dollar also linked to the slowness of the European Central Bank (ECB), which misjudged the inflationary risk? For Koen De Leus, “the ECB must act quickly and vigorously on the interest rate front. Energy bills denominated in dollars weigh heavily in the balance and accentuate inflation in the euro zone. Yet this is precisely the opposite of what the ECB wishes. She will therefore be forced to act”.
4. Towards a recession in Europe?
For the Chief Economist of BNP Paribas Fortis, once this rate hike mechanism is triggered, the economy of the euro zone will undoubtedly be affected more quickly by a recession than will be the case in the United States, where we expect a serious setback for the end of this year. “We have to expect difficult months. Moreover, the current decline in commodity prices shows that the markets and companies are anticipating such a scenario. And we still have to add the problems of China, where the policy of vaccination is hampered by less effective local vaccines and where the target of 80% vaccination rate of the population is hypothetical There will still be slowdowns in the Chinese economy, and new problems to come, not to mention with the health of the local real estate market. But, following a probable recession, there will be a recovery, but less firm no doubt than that observed following the first confinement”.
Cold snap for the ruble
After months of rising, the Russian ruble collapsed last week on the foreign exchange market in Moscow. The Russian currency lost nearly 10% of its value once morest the dollar and the euro, before recovering in waves. According to the Russian news agency RBC, the loss in value over the last three trading days has even reached 20%.
The ruble has weakened markedly since May, although its value is still higher than before the Russian invasion of Ukraine in February. The currency had become much more expensive due to massive restrictions on currency trading and Western sanctions once morest Moscow, which caused Russian imports to plummet. As a result, the demand for euros and dollars in Russia also fell. According to experts, the fall of the ruble is due to the easing of the monetary policy of the Russian central bank. In addition, Russian imports have increased slightly recently.
It should be noted that in the early days of the conflict in Ukraine, the Russian currency had fallen by 50% once morest the euro, before recovering in a market limited by the coercive measures taken by Western countries once morest Russia. After this initial cold spell, the theoretical value of the ruble had quickly tripled, before experiencing a first wave of profit taking at the end of June and this fall of 20%. Once once more, the ban on ruble debt transactions gives little credence to these near-separate valuations.
