Euro Area: Euro almost touches parity with dollar, recent gains seem short lived
March 27, 2015
Like many major currencies, the euro dropped to multi-year lows against the U.S. dollar in the first days of March. The euro had experienced a strengthening trend between the second half of 2012 and the first half of 2014, but this trend has reversed in the last six months. Starting in H2 2014, the euro began experiencing sharp, almost uninterrupted drops against the greenback, hitting multi-year lows in the first days of March. In fact, on 13 March, the euro traded at 1.05 EUR per USD, having weakened 7.7% over the same day the previous month and losing nearly a quarter of its value against the U.S. dollar in annual terms. This broke the psychological barrier of 1.10 EUR per USD as the euro hit the lowest level since 2002.
A variety of domestic and external factors have exerted pressure on the single currency. Among these factors are the European Central Bank’s extension of its asset purchase program—also known as quantitative easing (QE)—as well as expectations of an increase in U.S. interest rates this year and a decline in global oil prices. On the political front, the weakening of the euro has been aggravated by disagreement between the new Greek government, which is led by the anti-austerity SYRIZA party, and European leaders regarding Greece’s reform plans and whether the bailout program will keep Athens from running out of cash.
However, the euro did gain some of the ground it had lost against the greenback in recent days, which mainly resulted from recent disappointing data on the U.S. economy and the Federal Reserve’s meeting in which Chairwoman Janet Yellen made a subtle modification to the Fed’s guidance. Another factor contributing to the euro’s rally against the U.S. dollar is the notable improvement observed in economic indicators for the Eurozone. However, despite the euro’s recent uptick, further weakening is expected to continue as Mark Cliffe, Global Head of Financial Markets at ING Bank, points out:
In FX markets, the much anticipated divergence in transatlantic monetary policy is delivering a sharper-than-expected adjustment in the EUR/USD exchange rate. We had thought that parity would not be seen until year end, but aggressive EUR hedging from the buy side and still the prospect of higher US market interest rates over coming months means that we our [sic] bringing forward our parity forecast to June.
Should the depreciation of the euro continue this year, this will translate into an economic boost for export-oriented European manufacturers and ultimately for the whole economy in the Eurozone.
Author: Ricardo Aceves, Senior Economist