The first quarter of 2021 is behind us. Last year was the year in which foreign exchange traders entered with the consensus that the US dollar would continue its weak trend against the euro. The COVID-19 epidemic is the end of five years of exaggerated dollars and less euros, respectively.
Although the US Federal Reserve has been able to move interest rates significantly from zero, the main reason for this is the difference in interest rates resulting from the absence of the European Central Bank. After all, the growth of the US economy during this period outperformed the eurozone economy, as well as inflation in the United States was much closer to target values than it was on the European continent.
Over the past year, the epidemic has forced a response from economic policies, and on the currency side, with respect to fixed currency instruments, the United States has been able to drastically reduce its core interest rate; From what it is. This, of course, had a negative impact on the strength of the local currency, as well as the fact that the United States was the most affected country in the world by an epidemic.
According to the expectations of investors and analysts, this year was the year to normalize the situation, which should be reflected in the continuation of the strengthening euro trend. However, in the first quarter, the euro eventually lost four per cent of its value against the dollar. Why? The epidemic situation was completely reversed – the vaccine just changed the rules of the game in the United States, thanks to the successful vaccination there.
On the contrary, we cannot be sure that the EU will succeed at this time. From an economic point of view, growth expectations for this year have turned positive for the US economy due to the massive financial support there. In addition, it raises inflation expectations, and thus market interest rates.
That will not change in the future. When we add the results for the second quarter, do not be surprised if the market consensus is in favor of the euro again, but the dollar is red again.
Author Comrade Banga is the Chief Economist.