If by U.S. election time in November the ECB has cut rates three times, and the Fed hasn’t at all, “another test of parity is a real danger,” he added.
Derek Halpenny, head of global markets research at Mitsubishi UFJ Financial Group, said the ECB was as explicit as it could be about expecting to cut rates in June, and that he sees “further declines ahead.”
Halpenny said that while he was bullish on the dollar in the short-term, he didn’t think the euro’s weakness would last too long. Breaking $1.05 is “actually quite rare,” he noted. In nearly a decade, a “sustained breach” has only happened once, in the wake of Russia’s invasion of Ukraine.
A weaker euro will come as a relief for exporters — especially those in manufacturing who have been hit by higher energy prices. The tourism sector also stands to benefit, with Europe becoming a more attractive holiday destination for Americans as the dollar strengthens. But the slide in the currency will also raise the cost of key imports — notably energy, raw materials and other semi-finished products — creating a new round of inflationary pressure for hard-pressed consumers and businesses.
Halpenny pointed out that there are reasons for the euro to find support soon, however. He pointed to “green shoots” of recovery in the European economy, where business surveys point tentatively to renewed growth after nearly two years of stagnation. He noted that this, together with a pick-up in China, “will help ease negative sentiment about global growth.”
Lagarde’s comments also had a big, if delayed, impact on government borrowing costs on Friday. The yields on 10-year German and Italian bonds fell by as much as 0.15 percentage point, while the benchmark Euro Stoxx 50 index fell by 0.5 percent.
