All week the euro and dollar danced on a tightrope: they reached exchange rate parity (the same value) last Tuesday – as it had done last July, 20 years later – and since then the European single currency has sometimes been below the line and sometimes slightly above. What is certain is that the euro is trading below the dollar for the first time in two decades, posing additional challenges for the European economy. As a result of the health crisis, the war in Ukraine and the sanctions against Russia and especially the ensuing energy crisis, the value of the euro in world markets in general has fallen, which, after the already felt fall of 15% last year, surprised the experts don’t. One of the biggest problems it causes is the entry of inflation, in a Europe that already has an inflation rate of over 9%.
There are several reasons for this depreciation – such as high inflation, fears of a recession and the impact of the energy crisis – but one of the main reasons has to do with a more aggressive stance by the US Federal Reserve (FED) on the rise in benchmark interest rates, compared to the European Central Bank (ECB), which started this escalation later and more slowly. “It is impossible not to raise interest rates. We are lagging behind the benchmark rates of the US and other central banks and so we have to go after them. and since the price of these is fixed in the international market in dollars, this will the way,” assures João Duque, economist and professor at ISEG. He states that he believes it is very likely that interest rates will rise in a fairly aggressive manner compared to the ECB’s normal behavior, and that they will continue to rise to 50 basis points or 75 basis points until the end of this year. “I think the first 75-point jump might even happen in September. At the moment, the defense of inflation includes the defense of the euro, and this will only be defended if interest rates in the European Union increase,” explains from. One of the biggest problems caused by the weakening euro is the introduction of inflation, in a Europe that already has a rate of more than 9%.
It is certain that investors have penalized Europe for the slower response of the ECB, led by Christine Lagarde, to raising interest rates, and it is possible that the euro will continue to devalue against the dollar in the near term, says Carlos Andrade, chief economist at Novo Banco. “How far is difficult to say. But it would not be strange if it went back to 0.97 or even 0.95, depending on the evolution of the energy situation in Europe.
One of the main reasons for the depreciation of the single currency against the dollar is the greater aggressiveness of the US Federal Reserve in raising interest rates.
This move should eventually reverse when the Fed signals a pause in rate hikes and when the market focuses more on the problems of the US economy,” said the economist. “A weaker euro makes imported energy even more expensive, putting downward pressure on corporate margins and high inflation persists for a longer period of time. This is negative for household purchasing power and puts pressure on the ECB to raise benchmark interest rates, even at the risk of a recession, which could also be detrimental to the financial situation of households and businesses,” explains Carlos Andrade. The ECB has to weigh the risk of a recession against the risk of inflation becoming more pervasive and permanent and also believes that, as “the ECB’s mandate leans towards price stability, it must not avoid interest rate hikes in the coming months”.
Euribor at 2% by mid-2023
How far the ECB will raise interest rates depends on the evolution of factors that are very difficult to anticipate, such as the war in Ukraine, the supply of gas to Europe by Russia, among others. “According to current market expectations, the six-month Euribor could rise to around 2% in the second half of 2023, an increase of around 100 basis points within a year. Scenarios will need to be reviewed continuously, given the high uncertainty and volatility of the business cycle Carlos Andrade provides.
It remains to be seen whether the effect of these increases in home and consumer loans will be difficult for the Portuguese to oversee. João Duque believes that the Portuguese are prepared for the clash, as savings were made during the period of the pandemic and the banks are also optimistic. “Banks are now canceling the impairments they calculated last year in a very pessimistic perspective at the end of the moratoriums. The moratoriums were lifted and the default level did not increase, families continued to pay, but of course in an environment of more favorable interest rates than what they will have now,” he says.
Carlos Andrade also points out that the ECB interest rate hike could be relatively rapid in the near term, as the aim is to prevent inflation expectations from becoming “unanchored” as soon as possible and into a spiral where price increases lead to increases in wages. , which in turn lead to price increases, and so on. “But this rate hike is likely to prove relatively limited by historical standards. If the eurozone even slips into recession over the winter, the ECB should be forced to take a pause.”
The economist also believes that a slowdown or decline in demand from the end of the summer will ease supply pressures and moderate inflation.
On the other hand, a weaker euro would be positive from the outset for the competitiveness of eurozone exports. However, this effect is not so relevant today given the fundamental changes in the patterns of international trade in goods. “In the Portuguese case, it is also an effect of little importance, because Portugal exports a lot to the eurozone. The depreciation against the pound is not that big,” explains Carlos Andrade.
Helena C. Peralta is a journalist for Dinheiro Vivo
Source: DN
