Dhe players on the financial markets are looking with concern at the Federal Reserve and its head Jerome Powell, who will speak at the meeting in Jackson Hole on Friday about the fundamentals of inflation and monetary policy. Currently, the prevailing impression is that Powell will announce the continuation of the tight monetary policy, which should materialize immediately with a key interest rate hike of 0.75 percentage points in September. Under this impression, the euro plunged to a new 20-year low against the dollar. In August alone, the European currency had lost almost 3 percent and was most recently below par, i.e. an exchange rate of one to one. On Wednesday the exchange rate of the euro against the dollar dropped again to temporarily 0.9940 dollars.
The development was again supported by statements from the United States. Federal Reserve Bank of Minneapolis President Neel Kashkari said inflation in the US is very high and the central bank must act to bring it back under control. “By many, many standards, we have maximum employment and very high inflation. So it’s a completely imbalanced situation, which to me is very clear: we need to tighten monetary policy to balance things out,” he said Tuesday at a Wharton Club of Minnesota event in Minneapolis. “If inflation is 8 or 9 percent, we run the risk of uncloaking inflation expectations, which would lead to very bad outcomes, which would cause us to be very aggressive – Volcker-style – to anchor them again.” , he said, referring to former Fed Chairman Paul Volcker, who pushed the US economy into recession in the 1980s to fight inflation.
Tight monetary policy, the relative strength of the US economy and the propensity of foreign investors to buy American securities during uncertain times are supportive of the dollar. Kathy Jones, bond strategist at investment house Charles Schwab, expects the reasons for the strong dollar to remain important in the coming year, especially since investors are finding few alternatives. The fallout from the war in Ukraine weighs more heavily on Europe than the US, while China’s restrictive pandemic policies and weaknesses in the real estate market are dampening growth in Asia. Despite the recent slowdown in growth, the United States appears to be weathering the pandemic crisis better than its European peers. Charles Schwab analyst Jones points out that the United States’ gross domestic product (GDP) is currently 15 percent higher in nominal terms than in the third quarter of 2019 before the outbreak of the pandemic. The euro zone only recorded nominal growth of 8.3 percent during this period.
The ECB is in the levers
However, European monetary policy is also an important factor: “There is already a lot of ECB in this euro weakness because it has acted so extremely expansively for so long,” says Ulrich Leuchtmann, head of foreign exchange research at Commerzbank in the FAZ podcast “Finanzen & Property”. There is a risk that the development will continue. “The ECB can prevent that. If it now significantly raises interest rates and thus visibly combats the risk of inflation for the market,” says Leuchtmann. Then it could go up again with the euro-dollar.