The US dollar reached its highest level in over two years, fueled by weaker-than-expected economic data from Europe. The Eurozone and UK experienced contractions in November, leading to concerns about potential rate cuts and further economic downturn. Analysts predict continued downward pressure on the euro due to geopolitical risks and domestic instability.
Global equity markets and the euro rose on Monday, driven by relief that France’s far-right party, the National Rally, is unlikely to win an absolute majority in legislative elections. The outcome has eased fears of high fiscal spending and mounting debt, which had weighed heavily on markets. Markets also welcomed a slowdown in German inflation and signs that the Federal Reserve might cut interest rates this year.
The European Central Bank’s (ECB) latest report highlights a decline in the euro’s share in foreign exchange holdings. In 2023, the euro’s share dropped to 20%, driven by factors such as the rising popularity of the US dollar, Japanese yen, and other non-traditional reserve currencies. The ECB also notes that the Swiss National Bank has significantly reduced its euro-denominated reserves. Despite rising interest rates in the eurozone, the currency’s attractiveness has not improved due to higher rates in other regions and the eurozone’s muted economic prospects. The report also expresses concerns about Russia’s plans to reduce its euro stockpile, which could further impact the currency’s status in global foreign exchange reserves.
The US dollar struggled on Wednesday, extending losses incurred against the euro and sterling on Tuesday. The euro and sterling both benefited from positive economic data, while weaker US business growth and easing inflation pressures weighed on the dollar. Meanwhile, the yen remained weak despite intervention warnings from Japanese officials.
The US dollar remained stable in early European trading on Tuesday, while the euro gained on the back of positive European services activity data for April. Traders cashed in on recent safe-haven dollar gains following the easing of Middle East tensions and comments from Iranian officials indicating no retaliation against Israel. However, the greenback remains elevated due to strong economic data and hawkish Federal Reserve statements. Meanwhile, the eurozone PMI composite index rose to its highest level in almost a year, aided by a jump in the services PMI. Despite this, analysts anticipate interest rate cuts from the European Central Bank before the Federal Reserve, which may limit the euro’s gains. The British pound also strengthened on data signaling the fastest growth in business activity in nearly a year, although the manufacturing sector experienced an unexpected decline. The Japanese yen weakened against the dollar amid speculation of possible government intervention as it approaches new multi-year highs. The Bank of Japan’s policy meeting on Friday will be closely watched for any changes in interest rates, which were raised for the first time in 17 years in March.
The euro area economy is showing signs of recovery, with a major rebound in services activity. This has led to a rise in the euro’s value and dampened expectations for a rate cut by the European Central Bank (ECB) in June, at least for the time being.
Goldman Sachs’ strategists have highlighted the potential of the Dollar and Swiss Franc as hedges against inflation and geopolitical uncertainties. They have adjusted their Euro forecast, signaling a bearish outlook, and revised their EUR/USD target to 1.05. The analysis suggests that these currencies have shown resilience to rate sell-offs and are likely to maintain their strength given ongoing concerns about inflation and global tensions.
