Euro Hits 9-Month Low Against Dollar Amid Diverging US and European Monetary Policy Outlooks

Euro-Dollar Exchange Rate Trend [Image Source= Bloomberg]

[Asia Economy Reporter Byunghee Park] The Wall Street Journal (WSJ) reported on the 24th (local time) that the value of the euro against the dollar fell to its lowest level in nine months amid expectations that the monetary policies of the U.S. and Eurozone central banks will diverge.

The U.S. central bank, the Federal Reserve (Fed), is expected to begin tapering (reducing asset purchases) within this year. Recently, voices advocating for the implementation of tapering by Fed officials have been growing louder, which was also confirmed in the minutes of the July Federal Open Market Committee (FOMC) released last week. According to the minutes, FOMC monetary policy members judged that it would be appropriate to start reducing the pace of asset purchases this year as the U.S. economy showed an improvement trend as expected.

On the other hand, the ECB has shown no significant movement toward changing its quantitative easing policy so far. The ECB plans to purchase assets worth 1.85 trillion euros under the Pandemic Emergency Purchase Programme (PEPP) until March next year.

Simon Harvey, Senior Analyst at Monex Europe, a stock brokerage firm, said, "As advanced economies enter a clear recovery phase, central banks are expected to shift their monetary policies toward tightening, but the ECB will be at the tail end of that trend."

Another reason why the ECB's loose monetary policy is expected to be maintained longer is that inflationary pressures in the Eurozone are expected to be lower than those in the U.S. or the U.K.

Analysts believe that inflation in the Eurozone is less likely to remain at a high level for a long time compared to the U.S. or the U.K. This is because the Eurozone labor market is more rigid than those of the U.S. or the U.K., reducing the risk of inflation caused by wage increases.

Signs of economic slowdown in China could also fuel the euro's weakness, as major Eurozone economies such as Germany maintain strong trade relations with China.

Jane Foley, Foreign Exchange Investment Strategist at Rabobank, said, "When China's economy slows down, the German economy also shows signs of slowing," adding, "The slowdown in China's economy is another reason for the ECB to keep interest rates low for a longer period."

WSJ also reported that hedge funds have bet on euro weakness with contract volumes at their highest level since March last year.

The value of the euro against the dollar has fallen 3.9% so far this year.

This content was produced with the assistance of AI translation services.