The US dollar has surged to its highest point in over two years, marking an impressive eighth consecutive week of gains—its longest winning streak in 14 months. This dramatic rise is largely attributed to a wave of disappointing economic news emanating from Europe, significantly impacting the euro and the British pound.
Eurozone PMI Plunges into Contraction
November’s economic data from the Eurozone painted a bleak picture. Private sector activity unexpectedly contracted, triggering widespread concern about the region’s economic health. The flash Composite Purchasing Managers’ Index (PMI), a key indicator of economic activity, plummeted to 48.1. This reading, compiled by S&P Global, falls significantly below the neutral 50 threshold and marks the first contraction since January. Analysts had predicted the PMI to remain unchanged. The downturn is primarily driven by a decline in new orders, increased input prices, and escalating political uncertainty.
Chris Williamson, chief business economist at S&P Global, succinctly summarized the situation: “The flash PMI survey data for November revealed the eurozone economy slipping back into contraction, with the malaise spreading from the struggling manufacturing sector to the larger services economy.” This highlights the severity of the situation, impacting a broader range of sectors.
UK Economy Follows Suit
Across the English Channel, the UK also experienced disappointing economic news. Its Composite PMI fell to 49.9, a sharp drop from the previous month’s 51.8 and below market expectations of 51.7. This represents the first contraction in UK private-sector activity since October 2023. Williamson further commented, “The November PMI indicates the economy is entering a modest decline, with GDP potentially dropping at a 0.1% quarterly rate. However, the erosion of confidence suggests that worse may be to come—including potential job losses—unless sentiment improves.”
Dollar Index Climbs as Euro and Pound Tumble
The strength of the US dollar is vividly reflected in the US Dollar Index (DXY), a crucial benchmark for the greenback’s performance often tracked alongside ETFs like the Invesco DB USD Index Bullish Fund ETF (UUP). The DXY climbed above 107, a level not seen since November 18, 2022. This surge comes as the euro plummeted to $1.04 against the dollar, its lowest point in two years. The pound also suffered, falling to $1.25, on track for its eighth consecutive weekly loss – its longest losing streak since 1980.
While the US economy isn’t immune, forecasts for Friday’s flash PMI data suggest some potential resilience. Economists predict the Services PMI to rise slightly from 55 to 55.2 in November, representing the strongest expansion since August. Manufacturing is also expected to improve, though it’s likely to remain in contractionary territory, rising from 48.5 to 48.8.
Analysts Cite Geopolitical Risks and Domestic Instability
Several forex analysts have identified key factors contributing to the euro’s significant decline. Luca Cigognini, a forex strategist at Intesa Sanpaolo, points to the worsening Ukrainian crisis as a catalyst for risk aversion, negatively impacting both the euro and the British pound. Chris Turner of ING Group emphasizes the technical significance of the euro’s drop, stating, “Today’s release of softer-than-expected eurozone PMIs acted as the catalyst for EUR/USD to break below its two-year trading range. Despite the exceptionally rapid decline of roughly 7% in just two months, we remain confident in a further downward trajectory for EUR/USD.” He adds that support is limited, with the next key level around 1.0190/1.0200.
Alejandro Cuadrado of BBVA highlights additional downward pressures on the euro stemming from political instability in Germany, the results of US elections, and escalating geopolitical risks. His colleague, Michalis Onisiforou, focuses on Germany’s economic woes, noting that the collapse of Germany’s coalition government and subsequent early elections mean there’s no immediate fiscal response to address the prevailing pessimism. This, coupled with the Russo-Ukrainian war, creates significant headwinds for the German, and by extension, the European economy.
