Exchange rate slide: Will the euro become a soft currency?

Status: 07/06/2022 17:46

The euro fell sharply. Experts fear that the single EU currency may soon be worth even less than one dollar. Why is the price falling – and with what consequences?

Author: Nicholas Buschschlueter, ARD Stock Exchange Studio

The slippage in the financial markets is currently affecting virtually all forms of investing: stocks, gold, cryptocurrencies – and more and more often also the euro. Yesterday the single European currency fell below USD 1.03; today it was sometimes another percent lower. Parity with the dollar is getting closer. Does the euro become the so-called a soft currency – a tender that is influenced by high inflation and is increasingly losing its value?

Loss of wealth on two levels?

In any case, the euro and the dollar have not been nearly equal for about twenty years. The main reason for the weakness of the euro is, of course, the risk of a gas crisis. “If Europe were to run out of gas, it would be bad for the European economy. This alone has a negative effect on the euro, explains the currency expert Ulrich Leuchtmann of Commerzbank. “And at the same time it would be inflation, we would have an even greater price increase. It also weighs down on the euro. “

Weak Euro: This is usually good news for companies based here that have strong business in the US. German car makers can sell their products cheaper to American customers. Because now they have to pay less for the product in euros – and buy more. The situation is different for EU consumers, explains Baader Bank’s Robert Halver, especially now in times of high energy prices: “If the euro is weak, US dollar-denominated commodities become even more expensive. Firms have to introduce even more expensive products, and of course they are trying to pass these prices on, which of course gives another boost to inflation. ”

Halver expects that the weak euro will result in a loss of prosperity in Germany on two levels: for consumers because of rising prices, and for companies because they can no longer operate so profitably. Moreover, the broker believes that a weak euro is not a good sign for the entire European economy. Europe is currently not appreciated in the markets. “Right now we are kids who are causing problems in the stock markets, and the euro is something like the stock price in the region – and it’s very weak at the moment.”

The ECB has a dilemma

How could the euro rise again? One possibility is that the European Central Bank (ECB) will raise key interest rates more vigorously than previously announced. The US Federal Reserve has already set much higher interest rates and thus attracts investors to the dollar zone. If the ECB were to raise interest rates now, some money could come back – and strengthen the euro.

However, higher interest rates in the euro area could now weaken an already weakening economy. It is not an easy situation for the ECB, according to Commerzbanker Leuchtmann: “If the ECB resigned from the announced rate hikes, it would be negative for the euro again.” On the other hand, the ECB is now finding it more difficult to raise interest rates when there is the prospect that the economy will be hit hard. “The ECB is in a difficult position. But in the end – I think – there is no other option but to raise interest rates, ”concludes Leuchtmann.

Another way for a stronger euro would be to calm the gas market. Without a gas crisis, there is no reason for the euro not to recover, says currency exchange expert Leuchtmann. The euro would then avoid the already unflattering title of “soft currency”.

Will the euro now become a soft currency?

Nicholas Buschschlueter, HR, Jul 6, 2022 4:51 pm

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