Euro Hits New Lowest Level Against US Dollar in 20 Years

The euro is currently trading at its lowest level against the US dollar in 20 years. As of press time, 1 euro is equivalent to 0.9646 US dollars.

The euro depreciation, which also coincides with a similar plunge for the pound sterling, is due to a few macroeconomic factors. For instance, there is currently a recorded downturn in business activities in the eurozone as the region grapples with rising energy costs and inflation.

Euro Decline Could Spell Bad News for the Netherlands

According to prominent Dutch newspaper De Telegraaf, the decline in the euro could have far-reaching ramifications for the Netherlands. This is because around 70% of the country’s exports are within the European Union, thus heavily reliant on the euro. By contrast, other eurozone countries that export substantial amounts of goods to the US could benefit from the lower euro. This could happen because North American-bound products will be more easily purchasable by Americans.

Another contributing factor to the growing disparity between the euro and the US dollar is the difference in interest rate policies. According to De Telegraaf columnist and economist Edin Mujagić, the European Central Bank is hesitant to raise interest rates. This sharply contrasts with its US counterpart, the Federal Reserve, which has been hiking rates and concluded a recent 75 basis point increment. “The dollar then becomes more interesting because you get more interest,” concludes Mujagić.

The depreciating value of the euro implies that raw materials and energy products, including oil, will become even more expensive within the eurozone because these products are traded in US dollars. In addition to this unsavory development, the implication of a failing euro also suggests a rise in the price of US-imported goods.

As the euro wallows in its 20-year lowest level against the dollar, all eyes will be on incoming key German economic releases. However, expectations suggest that the IFO business climate and GfK consumer confidence releases will go even lower. Meanwhile, the preliminary September inflation release may also hike price pressures even higher, resulting in a steeper euro decline.

In Addition to Euro, Pound Sterling Also at Lowest Level vs Dollar

On Friday, the British pound plummeted to a 37-year low, and is currently trading at 1 pound to 1.07 US dollar. This comes even as Britain’s new finance minister Kwasi Kwarteng announced palliative measures to ease the burden of rising costs. Such measures include tax cuts, as well as household and corporate support measures. Furthermore, Britain’s debt office laid out plans for 72 billion pounds ($79.74 billion) of additional issuance. This mammoth budget would be used to fund the aforementioned stimulus plan by the finance ministry.

British bond yields also went up last week amid a decline in prices. For instance, benchmark UK 10-year yields soared to 3.829%, which has not been seen since April 2011. Weighing in on this development, George Saravelos, global head of FX research at Deutsche Bank, wrote:

“The market is giving very strong signals that it is no longer willing to fund the UK’s external deficit position at the current configuration of UK real yields and exchange rate.”

In addition, Saravelos also stated:

“The policy response required to what is going on is clear: a large, inter-meeting rate hike from the Bank of England as soon as next week to regain credibility with the market. And, a strong signal that it is willing to do ‘whatever it takes’ to bring inflation down quickly and real yield into positive territory.”

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Tolu is a cryptocurrency and blockchain enthusiast based in Lagos. He likes to demystify crypto stories to the bare basics so that anyone anywhere can understand without too much background knowledge.
When he’s not neck-deep in crypto stories, Tolu enjoys music, loves to sing and is an avid movie lover.