The Euro is now trading at $1.25, very close to the minimum level over the last two years. In the last 6 months, the single currency has depreciated more than 10% against the greenback, and most market watchers expect that it will end the year at $1.20 – possibly even at $1.15 in the medium term.
The divergences between the ECB’s and the Fed’s monetary policies are reflected in the trading of both currencies. Investors are counting on Mr Draghi maintaining interest rates close to zero throughout 2015, although they are unsure what the ECB will do in the second semester of that year.
The Euro decline could stop if Yellen’s central bank raises interest rates unexpectedly or if the Eurozone’s economy shows some sign of recovery.
For the time being, macroeconomic indicators are not very optimistic, unless we think high inflation in the eurozone is something positive. PMI manufacturing became stagnant in October, while German retail sales retreated during September (-3.2%/month), the biggest setback for Germany since 2007. This means that activity and confidence indicators begin to converge, thus compromising the difficulties that the German economy will face in the months ahead.
In theory, Euro depreciation benefits exporting countries the most –such as Germany. Forecasts say that for each 10% that the euro depreciates, the eurozone´s GDP should increase by 0.5%. However, many economists don’t believe that the Euro decline will be enough to save the Eurozone from a third recession. More measures are needed, from the ECB but also from the European governments.
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