The euro has weakened against the US dollar since the beginning of 2021, from around US$1.23 to its current exchange rate of US$1.13. By contrast, countries in the eurozone face a period of greater political instability. So while short-term currency movements are challenging to predict, there are many reasons to believe that the recent period of euro weakness will continue. Indeed, the Fed has recently started “tapering” or slowing down the rate of QE to stop it in the second half of 2022. On the other hand, the ECB has been discussing a replacement for its US$2.2 trillion (£1.7 trillion) QE programme when it ends in March 2022. A final driver of the recent strength of the dollar is more excellent political stability. The drop has also intensified in November, falling 3% since the turn of a month, which has seen violence in European capitals over COVID restrictions, migrant problems at the Belarus-Poland border and Russian troops massing on the border of Ukraine. The question of whether Emmanuel Macron will succeed in the French elections in April 2022 against Marine Le Pen also weighs on investors’ minds, as are the continued trade frictions between the EU and the UK over Brexit. Austria is now back in lockdown, and other eurozone countries could follow suit. The Biden administration still has three years in office and has recently passed its US$1.7 trillion. In addition, there have been significant anti-vaccine protests in France, the Netherlands, Germany and Italy, and European governments are now under intense pressure to bring their spending under control. Germany is seeing the 16 years of relative stability under Angela Merkel coming to an end. This is because increasing the money supply has the potential to stoke inflation. That’s a fall of about 9%, which is significant, especially since these are the two primary currencies of the world. Nevertheless, the euro is still stronger than a couple of years ago, when it was about US$1.10.
The US Federal Reserve officials have indicated that they plan to resume increasing interest rates to control inflation in the world's biggest economy. During the June meeting, the Federal Open Market Committee reached a consensus to keep interest rates stable for the time being to evaluate whether further tightening of policy would be necessary. However, the majority of the committee anticipates that additional rate increases will be required in the future. The minutes of the meeting have recently been made public. According to the minutes, most participants believed maintaining the federal funds rate at 5 to 5.25 per cent was appropriate or acceptable, despite some individuals wanting to raise the acceleration due to slow progress in cooling inflation. Although Fed forecasts predicted a mild recession starting later in the year, policymakers faced challenges in interpreting data that showed a tight job market and only slight improvements in inflation. Additionally, officials gr...
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