According to the expert, the currency market tries to anticipate changes in the interest rate. Risks affecting the euro area are also important.
The value of the euro compared to the US dollar has been falling steadily since summer 2021. More than a month ago, it was at its lowest point, when the euro fetched only 96 US cents. Right now, the values of the currencies are almost level.
The weakness of the euro has been historic, because the last time the euro was this weak was in 2002, when the euro had just come into use.
Head of the Bank of Finland’s Monetary Policy and Eurozone Economy Office Markku Lehmus says that the dollar strengthened against the euro, especially because the US central bank Fed started raising the key interest rate earlier than the EU central bank. The Fed started raising interest rates in March, the EU central bank only in July.
– Where there is a higher interest rate, that’s where capital goes, and this increases the value of the exchange rate, says Lehmus.
In addition, the Fed is believed to raise interest rates more than its European official brother in the future.
However, the strengthening of the dollar started even before the interest rate hikes. According to Lehmus, this was due to market expectations. The Fed sent messages to the market about upcoming interest rate hikes.
The interest rate level is linked to a forecast of the region’s economic growth.
– When there is an expectation of economic growth, there is also inflationary pressure, in which case interest rates are raised more, Lehmus explains.
War increases land risk
Capital avoids the area that is subject to risk factors. In Europe, a big one is the war in Ukraine, which has raised the price of energy high. In the United States, the risks are lower.
Lehmus points out that the strengthening of the dollar in relation to the euro does not so much mean the weakness of the euro area, but the strength of the United States. The dollar has strengthened against almost all currencies.
– In the United States, the monetary policy environment has changed quickly and the economy has also grown very well, Lehmus states.
According to Lehmus, the slight strengthening of the euro over the past month is the result of the market’s expectation that interest rates in the euro countries will rise more than predicted. In addition, the energy crisis predicted for the winter seems to be under control. This is why we dare to make investments in the euro area.
Lehmus does not want to start predicting future changes in currency values, as there are too many variables involved. Interest rate changes, economic growth and country risk, i.e. the development of the war in Ukraine, should be predicted at the same time.
– The best forecast is the current level of the currency.