The ECB and the USD

The ECB Governing Council decided on 8 September to raise all three key interest rates by 75 basis points (0.75%). This was significantly more aggressive than its hesitant stance until now had suggested. Moreover, ECB President Lagarde stressed that interest rates were still far from their peak and envisaged further rate hikes.

With this increase in the pace of the rate hike cycle, the euro is now also being supported. This is urgently needed, because the common currency has not been this cheap for about 20 years. For the first time since 2002, the euro has fallen below parity with the USD, because in recent years negative interest rates in the euro in particular have weighed heavily on the currency. Only between 2000 and mid-2002 did investors have to pay less dollars for one euro. At its lowest point, it was 0.82 dollars.

The euro has therefore been repeatedly weighed down by rising energy prices. Although the interest rate hikes will curb the economy, the central banks now see fighting inflation as the most important goal. Thus, the annual price increase in the euro was 9.1% in August and in the USA 8.5% in July. Producer prices in the euro zone even rose by a breathtaking 37.9% year-on-year. Looking at the interest rate forecasts of the futures markets for the next year, the Euribor should rise from currently around 1% to 2.5% and in the USA the 3-month rate should rise from currently 3.25% to 4.1%. This would mean a slightly higher interest rate increase in the Eurozone, but the absolute level would continue to support the USD.

Since the beginning of the year, the USD has risen by around 12% against the euro. This trend has now been slowed somewhat by the ECB and a countermovement could even begin. But as long as the energy crisis in Europe is not solved in the long term, higher gas prices will continue to weigh heavily on the common currency.