Euro falls to its lowest level since August on a strengthening dollar

The euro fell to its lowest level since August 13 against the US dollar following the publication on Wednesday of the minutes of the Federal Reserve (Fed) meeting. These revealed that officials were divided over whether a 0.5% rate cut was necessary, pointing to a slower pace in future rate cuts, which in turn strengthened the US dollar.

Since the end of September, the euro has depreciated 2.3% against the dollar, going from 1.12 to just over 1.09. The weakness of the euro is expected to translate into an increase in interest rates. This weakness will persist ahead of next week’s European Central Bank (ECB) monetary policy meeting, at which the institution is expected to apply its third rate cut of the year.

Change in expectations about the ECB and the Fed

The recent strength of the euro against the dollar has been seen more influenced by the Fed’s decisions than by those of the ECB. In September, the Fed began its easing cycle with a significant rate cut, triggering a fall of the US dollar and boosted the euro to a nearly three-month high. However, in October this trend reversed as market participants began to anticipate a softer rate cut by the Fed and a more pessimistic stance by the ECB.

This change in expectations about the future path of Fed and ECB rates is likely to keep the euro under pressure. The Fed’s 0.5% rate cut, which responded to a slowdown in the US labor market, may have been overestimated. Nonfarm payrolls data had shown slower employment growth and a rising unemployment rate.

However, the September employment report eased worriesas job creation exceeded expectations and unemployment decreased. The Fed used the term “recalibration” in its meeting minutes, suggesting that the big rate cut It was, in part, a response to delayed decisions compared to other central banks.

The minutes also noted: “Some participants noted that they would have preferred a reduction of 25 basis points of the target range at this meeting, and some others indicated that they might have supported such a decision.” Fed funds futures now indicate that a cut of one quarter percentage point in both the November and December meetings, instead of a reduction of half a percentage point.

Following the meeting, US government bond yields rose, with the benchmark 10-year Treasury yield rising to 4.07%, the highest on record in July, which is likely to continue. driving the uptrend of the dollar. Dilin Wu, research strategist at Peperstone, told Euronews: “Combined with the rise in Treasury yields of the US and a widening of the rate differential with its G10 counterparts, this underpins the dollar strength“.

Conversely, the ECB could adopt a more dovish tone due to weakening economic data and cooling inflation. Wu added: “It seems more likely that the ECB will adopt a dovish stance while remaining data-oriented.”

CPI fall in the eurozone

According to the preliminary estimate According to Eurostat, the Eurozone Consumer Price Index (CPI) fell to 1.8% year-on-year in September, due to below the 2% target of the ECB and below the 2.2% of August.

Germany, the largest economy in the Eurozonecontinues to struggle with the slowdown in the manufacturing sector, as indicated by the sharp drop in the ZEW Economic Sentiment, which fell to 3.6 in September, the lowest since October 2023. “The economic outlook appears increasingly fragile,” he said.

Although the ECB cut rates in September and declared that “did not commit in advance to a concrete type path“, recent weak data has moved market expectations toward a quarter-point rate cut.

The challenges of the euro in the face of tension in the Middle East

The current conflict in the Middle East could also weigh on the euro due to the possibility of higher energy prices. Since Russia invaded Ukraine, the eurozone has faced rising costs of living and economic stagnation. A similar situation could arise if the conflict of Middle East becomes a wider regional war.

Meanwhile, it is likely that the US dollar be seen as a active refugegiven the US’s geographic distance from the conflict zone, along with its resilient economy.

The European Union also faces the internal political uncertaintywith the rise of far-right movements in France and Germany. Additionally, tensions with China over tariffs on Chinese electric vehicles and potential retaliatory measures raise new challenges for the region’s economy. Consequently, the euro is likely to remain under pressure for the foreseeable future.