The euro fell slightly 0.1% to $1.0317 in early trade, approaching its lowest level in more than two years. Last week it touched $1.0125, the lowest level for the single currency in a long time. This decline came amid an atmosphere of economic and geopolitical tension, in light of mounting concern about the impact of tariffs that former US President Donald Trump threatened to impose on European goods.
US threats to impose new tariffs on goods from Europe remain the main factor putting pressure on the euro at the moment. These threats have pushed investors into a state of caution, leading to increased demand for the safe-haven dollar amid these concerns. Investors are now awaiting the European reaction to these threats, especially as the EU may take countermeasures in an attempt to protect its economy from any negative impact resulting from US tariffs.
At the same time, this continued decline in the euro reflects the economic challenges facing the eurozone in general. Although the European economy is showing some signs of improvement in some countries, there are significant challenges, most notably high inflation, slow growth, as well as political crises that may negatively affect confidence in the European currency. All these factors contribute to creating an environment of uncertainty in the markets, which increases the volatility of the euro.
On the other hand, the market expectations regarding the monetary policy of the European Central Bank are one of the factors affecting the movement of the euro in the coming period. At a time when the ECB faces challenges in maintaining currency stability, geopolitical and economic factors may continue to influence the volatility of the euro.
The impact of Euro volatility on markets
The fluctuations of the euro are one of the factors that greatly affect the global markets, as the euro is the second most traded currency in the world after the US dollar. In the event of significant changes in its value, it can directly affect global trade, investments, and financial markets. When the euro faces a significant decline, such as recently when it fell to a 13-month low, it could lead to fluctuations in the prices of goods and services traded between eurozone member states and trading partners.
It is worth noting that the euro is a major currency in many global financial markets, as many international companies are affected by the exchange rates of the European currency with other currencies such as the US dollar and the Japanese yen. Thus, a lower euro may make European goods cheaper for foreign importers, boosting European exports, but at the same time it may increase the cost of imports into the eurozone, contributing to increased inflation. In terms of financial markets, euro volatility has significant effects on stock and bond markets. When the euro depreciates, European stock markets may fall due to concern about the impact on profits and economic growth in the region. Conversely, investors holding other currencies such as the US dollar can benefit from these fluctuations, boosting capital flows to the US markets, thus supporting the value of the dollar.
In addition to these economic factors, political and economic shifts in eurozone countries, such as elections or political crises, contribute to increased euro volatility. For example, political uncertainty in large countries such as Germany could lead to a further weaker euro in global markets, as investors see an increased risk.
Factors that led to the decline of the EUR
The recent decline in the euro is due to several intertwined economic and geopolitical factors. One of the main factors contributing to this decline is the divergent monetary policies between the Eurozone and the United States of America. As the US Federal Reserve raises interest rates to combat inflation, European central banks have adopted a more conservative monetary policy, leading to a yield differential between the two currencies. This spread made the US dollar more attractive to investors compared to the euro, which contributed to the depreciation of the European currency.
In addition, political and economic tension within the Eurozone has significantly affected investor confidence in the European currency. The ongoing escalations between Russia and Ukraine and the resulting economic pressures, such as higher energy prices and their negative effects on European economies, have contributed to increased concern about the stability of the euro. Political uncertainty in Germany, the eurozone’s largest economy, especially in light of the internal challenges facing the EU, has contributed to low market confidence in the single currency.
Also, rising energy prices in the eurozone are causing significant economic pressures, as European countries suffer from an energy crisis as a result of the conflict in Ukraine, leading to a decline in economic growth in the region. These economic pressures increase expectations that the eurozone may face a recession, which increases concerns about the sustainability of the European economy and negatively affects the euro price.
Technical factors also play a role in the euro’s decline. When the euro falls against the dollar, the sell-off is stimulated by investors who expect a further decline in the value of the European currency.
