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FX.co ★ ECB rate-hike pushback poses threat to euro

ECB rate-hike pushback poses threat to euro

ECB rate-hike pushback poses threat to euro

ECB policymakers’ reluctance to raise interest rates next year dooms the common European currency to a steep fall. The euro that has already lost over 7% against the dollar this year, risks extending losses.

Such a pessimistic outlook can be attributed to the recent statement of ECB President Christine Lagarde. She does not favor an interest rate increase before the end of 2022. "A premature tightening of the monetary policy at the current juncture could endanger the economic healing of the euro area," Lagarde noted. This comment was enough for investors to lock in profits on the euro and shift their focus to the currencies of those countries that are preparing for interest rate hikes such as the British pound. The euro is currently drifting near a 16-month low at 1.13 against the dollar. The situation with the pound sterling and the Australian dollar is similar. The euro has even tumbled to 2015 lows against the Swiss franc, although key interest rates in Switzerland are lower than in the euro area.

By the second half of 2022, "the Fed could be hiking rates and this could make it difficult for the euro to claw back much ground versus the dollar," Jane Foley, Senior FX Strategist at Rabobank, said. Mark Hafele, chief investment officer at UBS Global Wealth Management, expects the US dollar to strengthen broadly next year, bringing the euro to $1.10 by the end of 2022. A 2022 rate hike seems to be a challenge for Europe, although inflation has already topped the ECB's 2% target and a new surge in COVID-19 cases threatens to slow economic growth.

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