Markets

Dollar weakness pushes euro to two-year high

D.he exchange rate of the euro against the dollar hit another high on Thursday. At times, the European common currency cost $ 1.2139. That was not more than since April 2018. After that there was a certain countermovement. According to the foreign exchange market, the short-term profits are said to have been determined primarily by news about the Corona crisis. The euro is benefiting on the one hand from the news about vaccine advances and on the other hand from the weakness of the dollar, write the analysts of the Landesbank Hessen-Thüringen.

The dollar index, which compares the exchange rate of the dollar to six major currencies, fell from more than 100 in the spring to 91 – and has also fallen again in the past few days. At the beginning of the pandemic, economists such as Joachim Fels from the bond investor Pimco and Rolf Langhammer from the Kiel Institute for the World Economy still expected the dollar to tend to profit from the crisis because it was particularly in demand as a “safe haven” in such situations. At the moment it doesn’t look like it.

Christian Apelt, Helaba’s foreign exchange market specialist, gives various reasons for the latest development. In the course of the hopes for a corona vaccine, the willingness to take risks has generally increased in the financial markets. Therefore, the dollar is less in demand as a so-called safe haven and is depreciating not only against the euro but also against most other currencies. The weak dollar would thus also be a phenomenon of global crisis recovery.

In addition, since November the pandemic has been shifting from Europe to the United States again, says Apelt. This means that the number of new infections is increasing significantly there, while it is falling again in the euro zone as a whole. “This will also be reflected to a certain extent in the growth figures and in monetary policy,” says Apelt. Any expansion of bond purchases by the European Central Bank (ECB), which may be due in December, has probably already been priced into the currency market.

Biden charges dollars

Recently, however, the signals have accumulated that the US Federal Reserve (Fed) for its part could increase its bond purchases. Bond purchases by the central banks tend to have a negative impact on the exchange rate, at least in the short term. In any case, the Fed has pursued a very expansive monetary policy this year, which is reflected, among other things, in the significantly higher growth in the American money supply, says Apelt. Under the new President Joe Biden, American financial policy will likely remain very relaxed – which is also not a positive signal for the dollar in the long term.

Holger Schmieding, the chief economist at the Berenberg bank, says the long overvalued dollar is slowly approaching its fair value. In particular, the interest rate advantage of the American currency has declined in recent months, emphasize the analysts of Deutsche Bank. “We interpret this as the end of the period of dollar exceptionalism,” says Stefan Schneider, Germany’s chief economist at the bank. This means that for a long time the dollar was valued higher than it actually corresponded to its value – among other things because it is a world currency, is considered a “safe haven” and was able to score points with higher interest rates in America.

“Exceptionalism was preserved at the beginning of last year through an American interest rate advantage,” says Schneider. In the course of the Covid-19 pandemic, the interest rate advantage has disappeared. At the same time, American exports were hit hard. “Together with the initially persistently high budget deficits, the more difficult financing of the American current account deficit should continue to depress the dollar.” The new American government is also unlikely to oppose a weaker dollar. Based on these estimates, the London currency market experts at Deutsche Bank expect a euro-dollar exchange rate of 1.30 for the end of 2021.

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