Euro to Dollar Exchange Rate Rises to Highest Level in Five Weeks

Last week, the euro to dollar exchange rate rose sharply in global markets, reaching its highest level in over a month after the European Central Bank (ECB) raised interest rates and announced the possibility of further tightening of monetary policy.

The dollar index, which shows the movement of the value of the US dollar against the other six major world currencies, fell by 1.2 percent last week to 102.25 points, close to its lowest level in a month.

At the same time, the dollar exchange rate against the European currency plummeted by 1.8 percent, bringing the price of the euro to 1.0940 dollars, the highest level in almost five weeks.

However, the price of the dollar rose against the Japanese currency by 1.7 percent to 141.80 yen.

The strengthening of the euro is attributed to the increase in interest rates in the eurozone to the highest levels in 22 years.

Specifically, the European Central Bank (ECB) again raised key interest rates by a quarter of a percentage point last week.

The refinancing rate for banks will now be 4 percent, while the overnight deposit rate for banks will be 3.5 percent. For overnight loans, commercial banks will now pay an interest rate of 4.25 percent.

Since July of last year, the ECB has raised interest rates in the eurozone by four percentage points.

Inflation is easing, but it will remain quite high for too long, reiterated the ECB in its explanation for further tightening of monetary policy.

Additionally, the ECB has significantly raised its forecasts for core inflation, which excludes energy prices, for this year from 4.6 to 5.1 percent.

As a result, ECB President Christine Lagarde stated that interest rates are likely to be increased at the July meeting as well.

Is the Fed Bluffing?

On the other hand, leaders of the US central bank decided last week to keep interest rates unchanged, in the range of 5 to 5.25 percent.

After raising rates for 10 consecutive meetings, this is the first time they have left them unchanged as central bank leaders want to see how previous rate hikes will affect the economy and inflation.

However, the Fed’s forecasts indicate that they expect at least two more rate hikes by the end of the year, in the range of 5.50 to 5.75 percent.

Thanks to this, the dollar index broke above 104 points mid-week. However, by the end of the week, it sharply fell as the market opinion prevailed that the Fed is ‘bluffing’.

As inflationary pressures in the US ease and economic growth slows, there is increasing speculation that the Fed will not raise rates to the levels its leaders expect.

– Following data indicating weakening inflationary pressures and economic resilience, stock prices rose, and bond yields fell as investors do not believe the Fed will be as aggressive as it tries to show. In short, the market does not believe that the Fed will raise rates two more times this year, says Ross Mayfield, a strategist at Baird.

In the money market, there is now an estimated 67 percent chance that the Fed will raise rates by another 0.25 percentage points in July, and that it could start lowering the cost of money in December.

As a result, the dollar weakened against a basket of currencies, and by the end of the week, its value slipped to the lowest level in over a month.