Euro also weakens against US dollar

OUTLOOK – AUGUST/SEPTEMBER 2014

Euro also weakens against US dollar

The euro has not been the master of its own destiny for some time. Rather than emerging triumphant following
monetary policy measures announced by the European Central Bank (ECB) last month, the Eurozone economy
is still struggling with low growth and low inflation; and the euro is still under pressure, particularly against
a strengthening US dollar.

Turning up the heat

The hot-and-cold Ukraine crisis turned the thermostat up to maximum temperature with the downing of MH17,
a Malaysian Airlines commercial airplane. Economic sanctions imposed upon Russia hampered business with
countries in the Eurozone, and Russia retaliated in early August by imposing counter-sanctions on European
Union food exports, further debilitating the fortunes of the Eurozone states, which see Russia as a significant
importer of food products.

Inflation – a perennial problem?

What is most worrying for the Eurozone is the risk of deflation. The inflation rate fell from 0.5% in June to
0.4% in July, far below the 1% threshold for the currency being in the ‘danger zone’, the point at which the
ECB considers the Eurozone economy to be at risk of deflation. The latest figure is very distant from the ECB’s
target of a robust 2%.

At the time of writing (12th August), mid-market rates were at €1/£0.7928 and €1/$1.3364

 

Forecasts

It is very difficult to find anyone who really believes that the Eurozone will be able to achieve any sustainable growth in the next few months or quarters. Growth was already showing a lack of traction before the

Ukraine crisis, which has only compounded the problems, especially for Germany, the stalwart of the
Eurozone economy.

We may also have a banking crisis on the horizon as the ECB tightens its controls over Eurozone banks.
We saw in July what could be the first of many bank refinances, when one of the Portuguese banks ran into
trouble. If the UK is a good case study for what can happen to a currency in this situation, then we should
expect the euro to fall.

It should therefore be no surprise that bank forecasts show the euro weakening against both sterling and the
US dollar over the coming months. We follow suit in our view. This would be welcomed by the powers that be,
because a weakening euro should boost both exports and increase inflation.

 

For expert guidance and help on how we can help with your international money transfers, call 020 7898 0500 or email us at [email protected]