Has the dollar peaked against the euro?
“One of the most aggressive experiments in monetary policy in history is about to end”, says Stephen Bartholomeusz in The Sydney Morning Herald. In a blog post this week, European Central Bank (ECB) boss Christine Lagarde signalled an end to unconventional policies that stretch back to the 2008 crisis. The eurozone deposit rate – currently -0.5% – has been negative since 2014. Lagarde signalled that “rate lift-off” could come in July and expects rates to hit 0% by the end of September. Headline eurozone inflation sits at 7.4%, but the ECB has been reluctant to tighten policy as quickly as the Bank of England or the Federal Reserve. Unlike US inflation, which has been turbocharged by loose fiscal policy, Europe’s inflation is more down to “supply-chain issues”, which monetary policy can do less to solve. Yet now even the ECB is joining the tightening trend.
The euro rallied to a onemonth high against the US dollar, after trading as low as $1.03 last week. The promise of higher rates now makes euro-denominated assets more attractive relative to the dollar. The euro also accounts for 57% of the US dollar index, which tracks the greenback against a basket of other currencies. A stronger euro thus heralds a weaker dollar. This year’s US dollar rally has been driven by “global safe-haven hoarding… similar in size to that seen during Lehman, Covid-19 and the Trump trade war”, says George Saravelos of Deutsche Bank. “The hoarding is so big and the dollar-risk premium so high that it will be difficult to add more.” The promise of faster ECB tightening and improving data out of Europe recently could see the EUR/USD rate hit $1.10 soon. Unless there is a “major global risk-aversion event, such as an escalation in the Russia/Ukraine war”, the dollar may now have peaked.