The Euro has lost 10% against the U.S. Dollar since the beginning of 2022 and is now close to being on an equal path to the Greenback. This week the single European currency fell dramatically to the 1.01 level, a level, which was lastly seen20 years ago.
Traditionally a weaker Euro is considered to be an advantage for the export oriented European economy, and in this kind of a situation the European Central Bank (ECB) normally advocates for the single currency to decline. However, recent realities make this issue more complicated.
The trade balances in various European economies are different to one another. Germany, Italy and the Netherland have a positive trade balance as they are exporting more than importing from the outside. They are benefiting from the weak Euro that increases their income and provides additional support for their exports. France, Portugal, Spain, and Norway are importing more than exporting and therefore have negative trade balances. So, they lose more on imports from the weakening Euro.
High inflation is becoming a key issue for the stalling European economy, making imported good even more expensive for European consumers. Inflation was a minor problem when it was way below targeted 2% and the ECB repeatedly tried to increase it towards the target. But now that prices are galloping 8.6% on average, expensive imports are dragging down production , consumers are negatively being affected, causing economic growth to be hampered.
Therefore, a weak Euro has become a drag rather than an advantage. But will the ECB intervene this time to curb the decline of the single European currency? For this to happen the European monetary watchdog has to raise interest rates dramatically and this would most likely hit countries of the European south that have a huge debt burden badly. High interest rates could lower investments and may have an additional impact on brining the recession even closer.
This is a complicated situation as the strong Dollar has a negative impact on many European economies, while efforts to strengthen the Euro could cause an even worse scenario. So, it may be wise to bet on the Euro-Dollar parity as the U.S. Federal Reserve continues to tighten its monetary policy. However, the recent slide of the Euro may be considered more emotional and excessive. Thus, technical correction may be seen more likely now.
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