The euro has experienced a significant downturn against the US dollar, plummeting to its lowest point in a year. This decline follows the release of the latest US Consumer Price Index (CPI) figures for October, which indicated a rise in inflation, exceeding expectations and further strengthening the dollar. The EUR/USD pair hit 1.0546 at 4:52 am CET on Thursday, marking the lowest level since November 1, 2023. Since the end of September, the euro has depreciated by 5.7% against the dollar, a trend exacerbated by persistent US inflation and recent political developments in the United States.
The recent Republican victory, securing a majority in the House of Representatives, has further amplified concerns. This political shift is perceived to increase the likelihood of policies potentially fueling inflation being enacted. Consequently, US government bond yields have risen, bolstering the appeal of the US dollar as an investment.
Persistent US Inflationary Pressures
October’s CPI data revealed that US headline inflation increased to 2.6% year-over-year, up from 2.4% the previous month. This marked the first increase since March, indicating a potential resurgence of inflationary pressures. Core inflation, excluding volatile food and energy prices, also showed a concerning trend, rising by 0.3% month-over-month and 3.6% year-over-year. This core inflation rate represents the fastest pace of increase since April, suggesting underlying and persistent inflation within the US economy.
These figures indicate that the battle against inflation by the US Federal Reserve is far from over. Despite these persistent inflationary pressures, market expectations still anticipate another interest rate cut by the Fed in December, albeit potentially a modest one of 25 basis points.
It’s worth recalling that in September, the Federal Reserve implemented a substantial 50 basis-point rate cut, driven by concerns about a cooling labor market and moderating inflation. This rate cut initially weakened the dollar, allowing the euro to appreciate to a 14-month high. However, the resilience of the US job market, coupled with ongoing inflation and renewed “Trade” policies potentially led by a strengthened Republican party, have reversed market sentiment, pushing the dollar upwards.
Rising US Bond Yields Enhance Dollar’s Attractiveness
The heightened inflation expectations have contributed to a notable increase in US government bond yields, particularly for longer-term Treasury notes. The 10-year Treasury yield has climbed to 4.47%, reaching its highest closing level since July 1st.
While short-term bond yields are closely linked to immediate interest rate expectations, longer-term yields reflect broader market views on economic conditions, inflation, and central bank policy over time. The rise in long-term yields suggests that bond market participants anticipate a robust US economy characterized by persistent inflation and consequently, higher interest rates. This combination of factors makes the US dollar a more attractive investment, driving up its value.
Michael McCarthy, a market strategist and COO at Moomoo Australia, predicts continued dollar strengthening due to rising bond yields. “This could drive a longer lift in the USD, as both local and global investors move into those more attractive sovereign yields,” he stated, highlighting the increased appeal of US sovereign debt.
Despite a slight cooling in Wall Street’s post-election rally on Wednesday, McCarthy believes the dollar’s strength remains intact. “In other words, the post-election enthusiasm for all things USD-denominated could continue and even accelerate, even if optimism fades and shares drop with it,” he added, suggesting that the dollar’s upward trajectory is independent of short-term equity market fluctuations.
Euro’s Weakness Projected to Continue Amidst Economic and Political Uncertainties
The euro is anticipated to remain under pressure against major currencies due to a combination of a challenging economic outlook for the Eurozone and persistent political uncertainties within Europe.
The potential for trade disputes between the US and its major trading partners, including the European Union and China, further complicates the outlook. A trade war scenario could necessitate a weaker euro to support European exports and maintain economic competitiveness in the face of potential tariffs and trade barriers.
In conclusion, the current economic and political landscape offers limited fundamental support for a stronger euro. Factors such as persistent US inflation, rising US bond yields, and a less optimistic outlook for the Eurozone economy suggest that the euro’s weakness against the US dollar is likely to persist in the near future. For those looking at currency exchange, particularly regarding transactions involving 14 Euro To Us dollar conversions, it is crucial to monitor these trends closely as they significantly impact exchange rates and purchasing power. The current trajectory suggests that exchanging euros for US dollars may continue to become more expensive in the short to medium term.
