The value of the euro rose well above USD 1.09. Before the Russian invasion of Ukraine in February 2022, the euro was still above USD 1.14. Subsequently, the currency has steadily declined in value. In July last year the euro was worth less than the dollar for the first time in twenty years. This is mainly due to fears of a recession in the euro area and higher interest rates in the United States, where the Federal Reserve (Fed) had started rate hikes ahead of the ECB in 2022.
As a result, the dollar has become more attractive and increased in value. In late September, the euro bottomed out at around $0.95. “The euro is climbing on expectations that the ECB will raise interest rates by at least another 1%, while the Fed may have as little as 0.5% in store,” says De Jong.
Several European Central Bank (ECB) leaders, including President Christine Lagarde and board member Klaas Knot, have already indicated in recent days that interest rates will be raised further in the coming months to curb high inflation.
Knot said this weekend that the ECB will hike interest rates by half a percentage point at both its February and March meetings, and continue to hike beyond March. By making loans more expensive, the ECB is trying to curb demand in the economy and this should curb inflation in the eurozone.
Inflation pressures
Meanwhile, fears of a severe eurozone recession have eased and expectations are at best for a slight economic slowdown. The US central bank is also expected to raise interest rates less aggressively in the near future, putting pressure on the dollar.
According to De Jong, an appreciation of the euro has a direct effect on the economy in Europe. “A stronger euro reduces inflation because imported goods become cheaper.” De Jong cannot say whether the hike will continue. “But the euro is probably still relatively cheap against the US dollar.”