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Politique monétaire, guerre en Ukraine, crise sanitaire…, pourquoi l’euro perd du terrain face au dollar

The dollar rises when the euro falls. A mechanical phenomenon that does not benefit the European currency, which, with a parity of 1 euro for 1.04 dollar, after having reached its lowest point for 5 years on Friday with one euro for 1.035, has never been so weak compared to the greenback for 20 years. So much so that some no longer rule out complete parity between the two currencies. While the euro is suffering from the impact of the war in Ukraine, which is much greater in Europe than in the United States, the dollar is playing its role as a safe haven more than ever.

Why such a phenomenon?

More than a shaky euro, it is the good health of the greenback that explains the fall in the value of the European currency against the dollar. The latter is benefiting from the decisions of the American Central Bank, which has opted for a tightening of its monetary policy. By raising its rates, it is, de facto, raising the value of the currency and trying to curb inflation which is reaching peaks in the United States with nearly 8.5% in March. A strategy that the Fed intends to pursue as recalled by the president of its New York branch, John Williams, last Tuesday. “I expect the (Fed Monetary Policy Committee) act quickly to bring policy rates back to more normal levels this year,” or around 2 to 2.50%, he said, at a conference in Germany of the Bundesbank and the National Association for Business Economics (NABE).

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So far unlike most major central banks, the ECB has ultimately announced a rate hike in July, the first in 10 years. The normalization of European monetary policy will take place at the start of the third quarter, European Central Bank President Christine Lagarde announced on Wednesday. This will put an end to its asset purchase program (APP) followed “a few weeks” a rate hike later. Objective: fight against inflation. As recalled Francois Villeroy de Galhau, Governor of the Banque de France and member of the Governing Council of the ECB, the current weakness of the euro on the foreign exchange markets could complicate the efforts of the ECB to achieve its objective of controlling inflation. So much so that he plans a meeting “decisive” in June concerning the rise in rates and an active summer in terms of monetary policy.

If the ECB has been slow to opt for monetary normalization, it is because it measures the risks that this strategy poses. It could indeed come to stem an already slowed European growth. Especially since the China’s zero Covid strategy is already penalizing the European economy. Punctuated by a series of confinements, it puts a brake on exports and imports. “It is the first exporter in the region. A good part of the German trade surpluses are linked to China”, says Véronique Riches-Flores, independent economist and founder of Richesflores Research. The shutdowns of Chinese activity are also disrupting the supply chains of French industry. These external factors, which are weakening Europe, further reinforce the dollar’s role as a safe haven for investors looking for stability.

What are the consequences for euro zone trade?

According to the Bank for International Settlements (BIS) in 2019, before the global pandemic of covid-19, 88% of transactions were made in dollars, against only 32% in euros and 17% in yen, as indicated by Céline Antonin, economist at the French Observatory of Economic Conditions (OFCE) and lecturer at Sciences Po Paris. In fact, raw materials, especially oil, are mostly traded in dollars. Already on the rise, their price therefore follows the inflationary curve of the American currency.

Conversely, the depreciation of the euro could have a positive effect on European competitiveness. “Certainly the cost of imports is increasing, but companies are gaining in competitiveness”, emphasizes Christian de Boissieu, professor at the University of Paris 1 and vice-president of the Circle of economists. Virginie Riches-Flores shows herself to be more nuanced. “Since the dominant market is the Chinese market, subject to the government’s zero covid strategy, the benefit for companies is limited.“, she advances.

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Which sectors are impacted?

Aeronautics, aviation, automotive, steel industry…”TAll the industrial sectors most correlated to the price of raw materials will suffer from this surge in energy prices”, explains Stéphanie Villers, independent economist. However, some companies have been able to anticipate and protect themselves against oil price inflation, in particular by contracting foreign exchange hedges. In other words, they undertake to buy a certain quantity of fuel at a fixed price, allowing them to escape any inflation beyond the established threshold. “But this strategy has a cost”recalls the economist specializing in Europe.

What prospects for the euro?

If it seems difficult to try conjectures concerning the evolution of the two currencies, US monetary tightening as well as the uncertainties around the conflict in Ukraine and the health situation in China do not allow us to envisage a recovery of the euro in the immediate future. Lhe decision of the ECB to raise its rates at the start of the third quarter did not prevent the euro from losing further ground. While it seemed to have stabilized at 1.05 dollars, it reached 1.039 dollars on Friday, despite a slight rise of 11% compared to the previous day.

However, the situation is not critical, advances Christian de Boissieu. “When the banking and financial euro was introduced in 1999, it was quoted at around 1.17 dollars then it constantly fell until it reached less than 0.90 dollars in October 2000, i.e. below parity”, he recalls. A situation that required the joint intervention of the central banks of the G7 members to sell dollars and buy euros. “But we are still far from this level”he assures. The fact remains that if this scenario were to occur, joint action would become essential both on the part of the United States, whose dollar would gain too much value and pose a risk to the competitiveness of American companies, and of Europe, whose currency would see its credibility seriously tainted.