The euro-dollar at a 20-year low

Last Thursday the Norges Bank raised its key interest rate more than expected. After a 50–basis point hike, it is now set at 1.75%. A further increase by 50 basis points could take place in September to contain inflation which continues to accelerate. In July, it hit +6.8% on an annual basis. The central bank’s president Ida Wolden Bache said: ‘A markedly higher policy rate is needed to ease the pressures in the Norwegian economy and to bring inflation down towards the target’ of 2%. During the COVID period, Norway kept its rate at zero for a long time to support the economy. Today, apart from the problem of inflation which is affecting all countries, the Norwegian economy is doing well thanks to its oil production, which is benefiting from high prices. The government expects growth of 3.6% in 2022. In Turkey, the situation is much worse. Inflation is out of control and is approaching 80% year-on-year. Despite this, the central bank, and behind it President Erdogan, is pursuing a monetary policy diametrically opposed to other Western central banks – it has lowered its key rate from 14% to 13%. The Turkish central bank believes that the cut is necessary to support the economy. After a 44% fall in 2021, the Turkish lira has lost another 27% against the dollar since the beginning of the year. In China, the post-COVID recovery is looking more complicated than expected. The latest economic figures were disappointing with retail sales weaker than expected, industrial production slowing and housing sales falling by almost 29%. On top of this there are new outbreaks of coronavirus, despite the ‘zero-covid’ strategy, and an unprecedented real estate crisis and factory closures in the Sichuan region where heat waves have forced the local authorities to ration electricity. In this context, China’s central bank has cut some of its interest rates in the hope of stimulating the economy. The Chinese currency has been falling sharply since mid-August, dropping below its May low and back to 6.88 yesterday, a two-year low – i.e. lower than before COVID.

The news isn’t any better in Europe: in Germany, the ZEW confidence index continues to sink into negative territory. Even more spectacularly, under the effect of energy commodity prices, producer prices soared by 37% in July. This does not bode well for company margins or consumer prices. In the UK inflation reached 10% in July on an annual basis and could exceed 13% by the end of the year. Workers in the rail and port sectors have gone on striker in recent days to protest against rising prices and demand better wages. The British pound is under pressure and is falling against most currencies. On Friday, it touched 1.1792 against the dollar and 1.1305 against the Swiss franc, its lowest level since March 2020.

Once again, the greenback comes out the winner. The dollar is still supported by its safe haven status, a favourable interest rate differential and some good figures at the beginning of the week. US industrial production was better than expected in July, supported by a strong increase in the automotive sector. Retail sales remained stable and the Philadelphia Federal Reserve Manufacturing Index returned to positive territory, although it remains at a low level. The Fed minutes released last week showed that the bank’s members remain committed to fighting inflation but did not provide a clear timetable for a rate hike. All eyes are now on Jackson Hole, Wyoming, where the US Federal Reserve is holding its annual symposium and where Chairman Jerome Powell is due to speak on Friday. In the United States, as in Europe (per the words of Fabio Panetta, President of the ECB’s Executive Board yesterday), there is a certain caution and the market is beginning to prepare for future rate hikes that are less severe than the previous ones, in order to prevent the risk of a recession in the economies.

In this context, the euro has continued to struggle and finally sunk below parity with the dollar to reach a 20-year low of 0.9901 yesterday. Against the Swiss franc, the euro is also continuing its decline with yesterday’s low at 0.9553. Finally, there has been a rebound in the price of oil. Saudi Arabia has warned that OPEC+ countries may decide to cut production to avoid a fall in prices if Iran returns to the market. Iran is not bound by the existing agreement between OPEC+ members to limit oil supplies and could immediately sell some of its stocks if sanctions are lifted.