The euro will remain weak against the dollar as Europe will remain at the heart of the crisis
|In recent years we have seen more and more often the sudden creation of large adverse shocks in the economy and markets. Two years ago, the whole world was faced with a pandemic, while today, it must find the solutions needed to manage the Russian invasion of Ukraine.
The geopolitical risk has sharply increased uncertainty, which in turn will hit confidence, signalling lower economic growth, higher government deficits, and an immediate increase in already growing public debt.
Europe is emerging as the most vulnerable to the new crisis as for decades, its production relied heavily on cheap energy from Russia. This is changing today, as a new world has sprung up since last week, where Europe and the rest of the world are called upon to manage it by paying a heavy price for this change.
The issue of high public debt will come to the fore again as major eurozone countries such as Spain, Italy, and even France are once again called upon to address the problem of their rising public debt.
With Russia's invasion of Ukraine and its consequent adverse effects on energy prices and growth, the market reluctance to finance heavily indebted eurozone member states with higher fiscal needs will intensify in the medium term. The EU Member States will need to support businesses and households as they already suffer from rising energy costs and high inflation. In addition, the increase in defence spending with massive programs, tens of billions announced by NATO member states, even from Germany, which until recently it was reluctant to spend large sums on defence, will create an additional increase in Europe's public debt.
Under these conditions, to keep public debt rates low, the Eurozone Member States' debt issuance will be primarily financed through the European Central Bank's quantitative easing program. At the same time, inflation is no longer the dominant issue for policymakers.
On the other hand, on the other side of the Atlantic, the United States will be affected by the crisis in Europe. Still, to a lesser extent, which means that there will be a radical divergence in monetary policy between the Fed and ECB. The US Federal Reserve, sooner or later, will begin to tighten monetary policy. At the same time, the ECB, as the war in Ukraine is a much bigger shock for Europe, will continue the program of quantitative easing. So, the prospect of normalizing monetary policy and rising interest rates in the US together with the Eurozone can no longer apply.
The weakness of this perspective will lead to a significant deviation of the euro against the dollar, with the euro being weak against the dollar, at least in the medium term.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.