Watch out, the euro is faking

Your euro is worth less and less, not only in the Netherlands but also across the border. Slowly but surely, however, the currency is regaining strength in currency markets.

In the Netherlands inflation is almost 10%, but abroad you also get less and less value for your euro. The currency has made a significant slide in the first five months. In mid-May it even looked as if a euro would be worth as much or little as a dollar within a short period of time. That's hard to swallow when you consider that less than a year ago you received more than $1,20 for your euro.

Although some posts have already anticipated a 1:1 exchange rate ratio, I wrote in this column three weeks ago that that magical boundary is further away than it seems. In the past it was also very often not possible to take this bump. Moreover, the momentum in interest rate markets seems to be slowly but surely turning in favor of the euro.

Lead, but for how long?
For now, the Federal Reserve has a significant lead over the European Central Bank (ECB). Since the turn of the year, interest rates in the United States have already been raised in two steps from 0,25% to 1%. In addition, the Federal Reserve yesterday began selling the $9 trillion in government bonds and other assets purchased in recent years to boost the economy.

In Europe, the buying program will not end until July. In recent weeks, however, it has become clear that the ECB will choose a different course immediately afterwards. Chairwoman Christine Lagarde recently hinted that a first rate hike could arrive at the meeting on July 21, followed shortly after by the second. That is a big contrast with six months ago, when Lagarde was still counting on interest rates not likely to rise until 2023.

Europe's catching up
Although the ECB will move later, there is a good chance that the interest rate rise will last longer on our continent than on the other side of the Atlantic. Many economists are anticipating that US inflation will decline again in the second half of the year. In Europe, that peak will probably not be reached until the fourth quarter. This is partly the result of increasingly strict sanctions against Russia, such as the oil boycott announced earlier this week, which are pushing up energy prices even further.

On Tuesday it was announced that inflation in the eurozone had risen to 8,1% in May. That was still 7,5% in April and economists had forecast a level of 7,7%. So-called core inflation – which excludes food and fuel prices – was also significantly higher than expected. Admittedly, the Federal Reserve is the first to move with a rate hike in mid-June. But the real interest rate surprises come from Europe for the rest of the year. And for that reason alone it is too early to write off the euro.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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