Euro hits five-year low on expectations of US Fed rate hike
London:
The euro edged closer to a five-year low against the US dollar on Tuesday, with the Federal Reserve expected to hike rates this week, while traders wait for European Central Bank President Christine Lagarde’s clues on monetary policy plans.
The Fed has taken an increasingly aggressive approach to monetary policy as inflation rose at the fastest pace in 40 years, while the ECB has been more cautious.
The US central bank has been seen raising interest rates by 50 basis points and announced plans to reduce its $9 trillion balance sheet at the conclusion of its two-day meeting on Wednesday.
Meanwhile, ECB vice-chairman Luis de Guindos said in an interview published by the central bank over the weekend that its governing council had not discussed “any predetermined path for rate hikes”. He said a lot would depend on the macroeconomic data in June.
“Following de Guindos’ scathing remarks over the weekend, we will be monitoring Lagarde’s latest comments today,” said Jeremy Strache, head of G10 FX strategy at CIBC.
Ms Lagarde is expected to speak later in the day.
Money markets are raising interest rates by 90 basis points through the end of the year, with the first hike expected in July.
Concerns about inflation, growth and energy insecurity as a result of sanctions imposed on Russia after the invasion of Ukraine have pushed the euro down 14 percent against the dollar in three months.
At 1100 GMT, the single currency was flat at $1.05040. On Thursday, it had fallen to $1.0470, the lowest since January 2017.
“The euro has found some support just above the 1.05 area, which was helped by a slightly softer US dollar today,” said Jane Foley, head of FX strategy at Rabobank in London.
“The EU’s energy security issues remain uncertain, suggesting that the euro is certainly not out of the woods,” she said.
Providing no support for the euro, data on Tuesday showed unemployment in the euro area continued to fall to a new record low.
Mr Strache said he did not expect the data to have an impact on the ECB’s rate expectations or the euro.
The dollar was also flat against a basket of currencies at 103.6, after reaching 103.48 on Thursday, the highest since December 2002.
Although the prospect is seen as low, some investors are seeing the prospect of a 75-basis-point increase from the Fed or a faster pace of balance sheet reduction than currently expected.
Over the past weeks, the US dollar has also benefited from safe-haven inflows as COVID-19 restrictions in China sparked concerns about global growth.
The dollar edged higher at 6.6880 against the Chinese yuan, its highest level since November 2020, in offshore markets.
The Japanese yen was above a 20-year low against the dollar on Thursday, as the Bank of Japan strengthened its commitment to keep interest rates ultra-low by vowing to buy an unlimited amount of bonds daily to protect its yield target. .
After hitting 131.24 on Thursday, the Japanese currency was at 130.10, its weakest since April 2002.
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