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Euro Regains Ground Against US Dollar as Global Economic Outlook Improves

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Euro Regains Ground Against US Dollar as Global Economic Outlook Improves

(CTN News) – Since dipping below parity with the US dollar in September of last year, the euro has recovered thanks to lowering oil costs, waning concerns of a severe recession later this year, and a more hawkish European Central Bank.

The euro’s advance to its present level at $1.08, up nearly 13% over the previous three and a half months, has been made possible by the dollar’s more general decline, which is down about a tenth versus a basket of six peers since reaching a 20-year peak in September.

The US Federal Reserve increased its key policy rate by 4.25 percentage points last year, the most in a single year in the previous forty years.

At the same time that investors were drawn to the US by the widening interest rate differential with other countries, which strengthened the dollar, the euro’s appeal was diminished by the rising energy costs caused by the conflict in Ukraine.

But since then, these patterns have partially turned around. According to Andreas Koenig, director of worldwide FX at Amundi, “the dollar was practically the only option for many years.” As more alluring choices become available, he said, “Capital is now migrating back home again” to economies outside the US.

For instance, after China changed stringent zero-Covid regulations in the latter part of last year, foreign capital rushed into the country, inspiring top economists to raise their predictions for global growth. In times of macroeconomic crisis, the dollar often gains strength.

The outlook for Europe has also brightened. Natural gas prices in Europe had fallen since late August to levels last seen before Russia invaded Ukraine, helped by better weather. This has eased concerns about a severe continental recession in 2023.

The Fed was also able to moderate the rate of rate increases because of the Atlantic’s declining headline inflation, with December’s 0.5 percentage point hike ending a string of four successive 0.75 percentage point increases.

Markets anticipate the Fed to start lowering interest rates in the second half of the year, despite the caution voiced by some central bank officials.

Lower rates would “take away a significant edge for the dollar,” according to MUFG currency strategist Lee Hardman, who anticipates the ECB would increase rates to 3.25 percent by the middle of the year from 2 percent.

The Federal Reserve was setting the pace with higher rate increases last year compared to other central banks, but the European Central Bank is now, for the first time, “out-hawking” the Fed.

He noted that by the beginning of 2024, the euro might reach $1.12 thanks to a growing divergence between Fed and ECB policies.

Even yet, Hardman is still “conservative about pricing much more upside for the euro relative to the dollar just yet” due to the remaining potential of increased energy costs, which would harm Europe’s terms of trade.

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