In a notable development in global currency markets, the euro broke through the $1.20 barrier on Tuesday, reaching its highest level since mid-2021. This rise, which amounted to 1.4% to bring the exchange rate to $1.2049, comes amid a decline in investor appetite for the US dollar amid growing expectations of a change in the monetary policies of major central banks.
General context and historical background
The EUR/USD pair is the most traded currency pair in the world, making it a sensitive indicator of global economic sentiment. Reaching the $1.20 level was not entirely unexpected, but rather the culmination of a months-long upward trend. Over the past twelve months, the euro has gained approximately 14% against the dollar. This shift reflects a divergence in economic expectations between the Eurozone and the United States. After a prolonged period of dollar strength driven by the US Federal Reserve's interest rate hikes to curb inflation, markets are now anticipating a slowdown in the pace of US monetary tightening, and perhaps even a move towards easing, while the European Central Bank maintains its hawkish stance to counter price pressures in Europe.
The importance of the event and its expected impact
If the euro surpasses this important psychological level, it will have wide-ranging repercussions on various levels:
- At the European level, a strong euro is a double-edged sword. On the one hand, it helps curb imported inflation, as the cost of purchasing goods and services from outside the eurozone (especially those priced in dollars, such as energy) becomes lower. On the other hand, it harms the competitiveness of the region's exports, as European products become more expensive for foreign buyers, which could negatively impact major export-dependent economies like Germany.
- Internationally, a weaker US dollar leads to changes in global capital flows. It also makes dollar-denominated commodities, such as oil and metals, cheaper for countries using other currencies, potentially stimulating global demand. For countries that peg their currencies to the dollar, such as many Gulf Arab states, a stronger euro means higher import costs from the eurozone, which can affect domestic consumers and businesses.
- Looking ahead: Investors are closely monitoring upcoming economic data from both economies, particularly inflation and growth indicators, as well as statements from European Central Bank and Federal Reserve officials, which will determine the future path of interest rates and, consequently, the direction of the EUR/USD pair in the coming period.
Other European currencies also performed strongly, with the Swiss franc rising by 15% and the Swedish krona climbing by about 20% against the dollar over the past year, confirming the general trend of the weakening US currency in global markets.
