The Euro slumped to its lowest level this year on Friday, a belated reaction to European Central Bank President Christine Lagarde’s signal on Thursday that the bank was ready to cut interest rates sooner than her US counterparts – POLITICO.
The euro was trading at $1.0631 at midday Friday, down nearly 3 per cent from earlier in the week and nearing its biggest weekly drop in 19 months.
The custodians of the world’s two most important reserve currencies were expected to change their rates more or less in sync with each other as inflation fell, but that changed this week.
The European Central Bank (ECB) on Thursday gave its strongest signal yet that it will start cutting its key deposit rate in June, which has hit a record high of 4 per cent since September.
Christine Lagarde told a press conference after the ECB Governing Council’s meeting on Thursday: “We are not Fed-dependent.”
Greece’s central bank governor, Yannis Stournaras, said on Friday he wants at least four rate cuts from the ECB this year, starting with consecutive cuts in June and July.
In contrast, a stronger-than-expected US inflation report on Wednesday dampened prospects for a near-term rate cut by the Federal Reserve Board (Fed). Financial markets, which had expected six quarterly cuts from the Fed at the start of the year, now expect no more than two, following a string of data showing that the US economy is holding up better than expected. Higher interest rates tend to make it more attractive to own currencies, boosting their value compared to those offering lower yields.
The euro has traded above the dollar for much of the past two decades. Kit Juckes, chief currency strategist at Société Générale, said it is becoming increasingly likely that the currencies will trade at parity at some point in the not-so-distant future.
Juckes noted that it is likely that the euro will start to test the $1.05 level in the coming weeks, and a stinging rate cut in July, if not backed by the US central bank, will put it under even more pressure. The key point is that if by November election the ECB has cut rates three times, and the Fed hasn’t at all, “another test of parity is a real danger,” he added.
Derek Halpenny, head of global markets research at Mitsubishi UFJ Financial Group, said the ECB has been as candid as possible about the expectation of a rate cut in June, and further cuts are possible. He also said that while he is optimistic about the dollar in the short term, he doesn’t think the euro’s weakness will last too long. Breaking $1.05 is “actually quite rare,” he noted. In nearly a decade, a “sustained breach” has only happened once, after the conflict in Ukraine began.
A weaker euro will be a relief for exporters, especially those in the manufacturing sector, which has been hit by higher energy prices. The tourism sector will also benefit as Europe will become a more attractive holiday destination for Americans as the dollar strengthens, but a weaker currency will also raise the cost of key imports.
