Eurozone: Euro appreciates to strongest value since January 2015
August 28, 2017
High uncertainty in the United States coupled with strong economic momentum in the Eurozone led the euro to appreciate to its strongest value against the dollar in over two years in August. On 28 August, the euro traded at 1.20 USD per EUR, which represented a 1.8% appreciation from the same day of the previous month. The result represented a 6.0% gain from the same day last year, and the euro was up 13.3% year-to-date.
The euro’s gain is primarily due to events in the United States. A turbulent political situation has exerted pressure on the dollar; combined with expectations of fewer and smaller interest rate hikes by the Federal Reserve, it has caused the value of the dollar to plummet. Meanwhile, the Euro area’s economy has fired on all cylinders so far in 2017, enjoying a notable period of growth. However, the strong appreciation could take a bite out of export revenues in H2, as it weighs on competitiveness and undermine the gains in the recovery seen this year. Moreover, the appreciation could put downward pressure on inflation, complicating the ECB’s upcoming monetary policy decision. While the recovery has picked up steam, reducing the need for an ultra-accommodative monetary policy stance, inflation still remains far below the ECB’s target. Peter Vanden Houte, Chief Eurozone Economist at ING, explains their outlook for monetary policy, commenting:
“We […] expect that the ECB will step up its vocal intervention against the strengthening of the euro. One should remember that Draghi’s predecessor, Jean-Claude Trichet, several times tried to stop the euro’s appreciation by stating that brutal currency moves were most unwelcome. But even then, the euro exchange rate might end up being a bit stronger than previously thought, which leads us to believe that the first deposit rate hike might now only come in January 2019.”