The Euro has reached parity with the U.S. Dollar for the first time in 20 years, but it seems that the Euro could be on its way down as there are internal reasons why the single European currency could decline while the Greenback could rise further. The Dollar has been rising aggressively over the last couple of months. The U.S. Dollar index (DXY) climbed from 95 points at the beginning of 2022 to 108 points, or 14%, recently.
The Dollar is strengthening as the Federal Reserve (Fed) continues to tighten monetary policy by drastically raising interest rates to combat record inflation. Such actions strengthen the Dollar and the yield of Dollar-denominated debt. The U.S. economy is more stable than in most other countries. The Dollar is also performing a safe-haven asset role amid geopolitical tensions, the slowing down of the global economy, and the energy and food crisis. On the other hand, Europe has already been strongly hit by these risks. Rising energy prices and a shortage of fuel supplies from Russia, as well as deteriorating food supplies, is undermining the economy. The risks of an economic slowdown in Europe are much stronger than in the last decade. The war in Ukraine, which has forced many people to leave their homes and become refugees, is limiting exports are hampering European economic abilities. The European Central Bank (ECB) seems to have no other choice right now but to keep interest rates low to support domestic economies. Any monetary tightening efforts may unwind the debt crisis, especially in southern Europe and prompt economic slowdown. The yields for European debt remain low at 1.0-1.2% in average compared to U.S. 10-year Treasuries yields at 2.9%. This is quite a large gap.
The negative factors continue to weigh in on the Euro and this may lead to a further decline towards 0.97-0.98. Although some correction to the strong resistance level of 1.03-1.04 could be possible. However, a downside trend for the Euro has the upper hand as the Fed is set to continue monetary tightening for at least the next six months. If the recession risk fades in 2023, the ECB may raise interest rates more aggressively and catch up with the Fed. Then the Euro may be back on the upside track towards 1.5-1.6. But that is only one of the possibilities that may became reality only in 2023.
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