Due to Global Economic Uncertainty, Dollar Surges... 1 Euro = 1 Dollar Expected for the First Time in 20 Years

Amundi CIO "Euro Weakness Continues Due to Speed Difference in Fed and ECB Rate Hikes"

[Asia Economy Reporter Park Byung-hee] As global economic uncertainty grows, the dollar, a safe-haven asset, is showing ultra-strong performance, and there is a forecast that the '1 euro = 1 dollar' parity will occur for the first time in 20 years.

Vincent Mottier, Chief Investment Officer (CIO) of Amundi, Europe's largest asset management company, warned of the risk of a recession in the European economy and predicted that the euro would reach parity with the dollar within this year, according to major foreign media reports on the 11th (local time). The French asset management firm Amundi manages over 2 trillion euros, the largest amount in Europe.

CIO Mottier noted that the Federal Reserve (Fed) of the United States and the European Central Bank (ECB) have different focuses in their monetary policy operations, and accordingly, the euro is expected to weaken against the dollar. He explained that while the Fed centers its monetary policy on curbing inflation, the ECB focuses on suppressing the rising borrowing costs of Eurozone member governments. This difference in monetary policy direction causes a divergence in the pace of interest rate hikes between the Fed and the ECB, ultimately leading to the euro reaching parity with the dollar within this year.

CIO Mottier said, "The Eurozone economy is facing a low growth or recession crisis," adding, "Within the next six months, the value of the euro and the dollar will become equal."

Since its introduction in 1999, the euro initially maintained a lower value than the dollar during the early years when it was used alongside the existing currencies of Eurozone member countries due to skepticism about the new currency. However, since 2002, it has always held a higher value than the dollar. Just before the 2008 global financial crisis, the euro reached an all-time high, with the euro-dollar exchange rate approaching 1.6 dollars per euro.

Currently, the euro-dollar exchange rate is around 1.05 dollars per euro, marking the lowest euro value against the dollar in five years. The euro has weakened about 10% against the dollar over the past six months.

While the Fed raised its benchmark interest rate by a total of 0.75 percentage points in its last two monetary policy meetings, the ECB has not yet raised its benchmark rate. With Eurozone inflation surging recently, voices calling for a rate hike at the July monetary policy meeting are growing louder.

However, CIO Mottier pointed out that one should not expect the ECB to raise its benchmark interest rate significantly.

CIO Mottier noted that as the Eurozone economy falls into a low-growth phase, the ECB cannot help but worry about the rising borrowing costs of member countries with high debt ratios. He explained that the slowdown in growth will constrain the ECB's interest rate hikes.

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

CIO Mottier explained that the ECB's monetary policy inflation target is to maintain a level close to 2%, but this is only the third priority of the ECB's policy goals. He added that the ECB prioritizes reducing borrowing cost disparities among Eurozone member countries to pursue Eurozone integration and support economic growth over price stability.

Therefore, CIO Mottier expects the ECB to raise its benchmark interest rate twice by 0.25 percentage points each in the second half of this year. For the Fed, it is expected to raise the benchmark interest rate by 0.5 percentage points in June and July and continue to raise it by 0.25 percentage points in subsequent monetary policy meetings. There is also a forecast that the June hike could be 0.75 percentage points instead of 0.5.

The Fed is expected to raise its benchmark interest rate to around 3% by the end of this year. CIO Mottier said that if the ECB focused on price stability, it would raise the benchmark rate to 1.5%, but he does not think the ECB will do so.

CIO Mottier said, "The ECB is focusing on the size of government debt and the financing capacity of Eurozone member governments," adding, "The ECB cannot avoid participating in political tasks such as member governments' green energy transition and increased defense spending."

The ECB has continuously stated that after ending the support measures introduced for economic stimulus following COVID-19, it may introduce new policies to prevent rising borrowing costs for vulnerable member countries.

However, CIO Mottier predicted that it will not be easy to introduce new systems solely for vulnerable countries due to opposition from Northern European countries such as Germany and the Netherlands. He then expected that the ECB will ultimately have no choice but to take a slow approach to raising benchmark interest rates.

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