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The euro is the weakest against the dollar in 5 years
Since the beginning of the year, the euro has depreciated by nearly 7% against the US dollar. Today the rate of the main currency pair EUR / USD, falling to 1,065, hitting its lowest level since April 2017. Several reasons appear to contribute to the relative weakness of the single currency against the USD.
Different attitudes of the Fed and the ECB
One of them may be the actions of central banks. The fact that Federal Reserve already in March, it started a cycle of tightening the financial policy and raised interest rates for the first time in several years. Currently, money markets expect the US Fed to raise interest rates twice by 50 bp at the next two meetings. Meanwhile European Central Bank still hesitating to act. And only in July it may raise interest rates by 25 basis points.
By raising interest rates, both big central banks intend to counteract inflation, which now seems to be hitting all-time highs in the euro area, and at the highest levels in 40 years in the United States.
The war weighs on Europe and Russia suspends gas supplies
Another factor that may place the dollar in a privileged position against the euro seems to be Russia's aggression towards Ukraine. Naturally, the effects of the war in Europe may turn out to be more severe for European countries than for the United States.
The European Union is imposing sanctions on Russia, limiting, inter alia, purchases of raw materials from this country. Russia, however, does not remain passive. And it suspended gas supplies to Poland and Bulgariawith the proviso that it will remain cut off until these countries agree to pay for the resource in rubles.
Terrible sentiment in the largest economy of the euro area
Concerns about the economic slowdown and economic data from the euro zone may also speak to the disadvantage of the single currency. Latest GfK statistics showed that consumer sentiment in Germany, the largest economy in Europe, fell to a record low level of minus 26,5 points at the end of April.
