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Currency symbols on a wall in Beijing:
dollar rally and euro weakness are having a global impact
Photo: Mark Schiefelbein/dpa
In the summer of 2021, investors suddenly received new signals from the US Federal Reserve.
Jerome Powell
(69), head of the Fed, expressed more confidence in the development of the US economy than before.
At the same time, he was more critical of rising inflation.
At the time, the financial market players knew what Powell wanted to say: the times of ultra-cheap money will soon be over, get ready for rising interest rates.
And they acted accordingly: Since mid-2021, more money has flowed into the dollar area and the US currency has risen.
The US dollar rally that Powell set in motion has now been going on for more than a year - and it is also a slide in the euro.
Investors, business people and tourists still had to pay more than $1.20 for one euro in May 2021.
Both currencies are now worth about the same, and the exchange rate is currently hovering around what is known as parity.
The renewed strength of the dollar, which remains the world's most important currency, has consequences for the entire economy.
But which?
What further developments can be expected?
And what does that mean for investors?
Here are the answers to the most important questions.
What are the Reasons for the Dollar Rally?
The main reason for the strength of the dollar is the monetary policy of the central banks, above all that of the Federal Reserve in the USA.
In order to counter rising inflation, it has already raised its key interest rate four times in the current cycle, most recently in July of this year.
The interest rate is currently in the range between 2.25 and 2.5 percent.
But it won't stop there.
Fed Chair Powell has already announced an interest rate range of 3 to 3.5 percent by the end of the year.
At the central bankers' meeting in Jackson Hole a few days ago, Powell expressed his pugnacity and indicated that he will probably continue to hold tight interest rates.
The European Central Bank (ECB), on the other hand, has been more cautious so far, long considering inflation to be a temporary phenomenon.
Only in July, after much hesitation, did the ECB increase its key interest rate again for the first time in eleven years.
It is now at 0.50 percent.
In the meantime, the ranks of the ECB's bankers have become more vocal about the fight against inflation.
However, the lead of the Americans has led to a significant interest rate differential between the dollar and the euro area, which is likely to be decisive for the change in the exchange rate.
An example: The yield on US government bonds with a term of ten years is currently more than 3 percent again.
The yield on the ten-year federal bond, on the other hand, is around 1.5 percent.
In addition, the different economic developments in the two currency areas have an impact on the exchange rate.
The US economy is proving to be robust, which is not least one reason why the Fed sees scope for further rate hikes.
In Europe, on the other hand, the war in Ukraine and the energy crisis are significant risk factors.
Many economists believe that a recession is imminent for the local economy.
The ECB should therefore have less leeway for further rate hikes.
Investors who want to choose one of the currency areas will therefore not find it difficult to choose.
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Corona crisis reloaded:
China keeps fighting the virus - at the expense of the country's economy
Photo: ALEX PLAVEVSKI / EPA
Finally, developments in the Far East also play a role.
China's economy is thrown back time and again by new corona outbreaks and the rigid quarantine policy, most recently in the tech metropolis of Shenzhen.
In the second quarter of this year, for example, the People's Republic disappointed with economic growth of just 0.4 percent.
The economic downturn is affecting Europe more than the US because the European economy is more closely intertwined with China's.
This also weakens the euro against the dollar.
Is the euro only weak against the dollar?
no
The euro has lost around 15 percent of its value against the dollar within a year.
And the euro has also lost some of its value significantly against the currencies of other important trading partners.
It lost about 10 percent against the Chinese yuan within a year.
Against the Swiss franc, the minus is even 11 percent, while against the British pound it is still less than 2 percent.
Prominent exception: compared to the Japanese yen, on the other hand, the euro has even appreciated by around 5 percent over the past twelve months.
What are the consequences of the exchange rate shift for Germany?
In principle, one thing is clear: if the euro depreciates, all imports from non-euro areas will become more expensive.
Conversely, goods and services that are sold from the euro area to other currency areas become cheaper for local buyers, which can tend to boost sales.
There are two opposing effects.
The weakness of the euro against the dollar and the yuan is particularly important for the German economy, since the USA and China are Germany's most important trading partners.
China leads the list of countries with the highest foreign trade turnover by far.
However, a closer look shows that China is above all an important supplier of German import goods.
At this point, the exchange rate development has a particularly negative effect, because it makes imports from the People's Republic more expensive for German companies.
The largest part of exports from Germany, on the other hand, goes to the USA, followed by the two euro countries France and the Netherlands and fourth place by China.
The companies benefit here, especially in the still export-oriented German industry.
Exporters to the USA in particular can be happy about the euro's weakness because it is boosting their business.
The main beneficiaries are car manufacturers such as Volkswagen, BMW or Mercedes, machine builders such as Trumpf, Kion or Thyssenkrupp or companies from the chemical industry such as Bayer or BASF.
Their products make up the largest part of German export sales:
A glance at the figures from the Federal Statistical Office shows what all this means for the German economy.
Accordingly, German exports increased by 13.4 percent to 763.9 billion euros in the first half of 2022 compared to the same period last year.
The weak euro is likely to have played a not inconsiderable role in this.
This export boom can also be found in the latest quarterly figures from large local corporations.
According to an evaluation by the economic consultancy EY, the 40 Dax companies were able to increase their total sales by 13.7 percent to a record level in the second quarter - also thanks to currency effects, as EY reports.
According to the analysis, companies in the United States in particular achieved high growth rates.
Sales, however, is only one important key figure - another is profit.
Things have recently looked less positive for Germany's largest listed companies.
As the EY study shows, the total profit of the 40 Dax companies fell by 19.3 percent in the second quarter to just under 39.6 billion euros.
The main reasons for this were undoubtedly high energy and raw material prices as well as rising material and logistics costs, as well as increasing consumer restraint in the face of rapidly rising prices.
But the negative effect of the weak euro on imports is also likely to have had an impact on the cost side.
What does the exchange rate shift mean for inflation?
High inflation and a weak currency, which Europe and Germany are currently experiencing, are an unhealthy mix.
Both phenomena can reinforce each other.
Due to the weak euro, goods purchased abroad are becoming more expensive for euro owners.
This will give the already high inflation rate in the euro area an additional boost.
The effect is even stronger if these goods come from a country where the inflation rate is also high, as is currently the case in the USA, for example.
Economists also speak of "imported inflation" in this context.
Here, too, a look at the figures makes it clear that these are by no means academic considerations.
According to the Federal Statistical Office, import prices rose by 29.9 percent in June 2022 compared to the same month of the previous year.
The main price drivers were energy imports, above all natural gas imports.
The increase is largely due to the conflict between the West and Russia.
However, the appreciation of the dollar also plays a role.
What further developments can be expected?
As always, a forecast is uncertain, but in this case there are some indications that the euro will continue to weaken in the near future.
As described above, the US Federal Reserve is likely to continue to take stronger action against inflation than the ECB.
It's not just the stronger US economy that will probably continue to lure investors into the dollar area in the future.
Rather, the interest rate differential between the two currency areas is likely to remain for the time being.
In particular, developments on the gas market are being followed closely, as they are making a significant contribution to Europe's economic problems.
If the gas price rises, the euro falls – this reaction has been observed again and again in recent weeks.
The mere announcement by the Russian side that the Nord Stream 1 pipeline would now be shut down for a few days caused the European currency to collapse spontaneously.
Against this background, quite a few financial professionals expect the dollar rally to continue – and the euro weakness to continue.
A leading Citibank expert recently told US broadcaster CNBC that both the outlook and the trading position are assuming that the euro will continue to depreciate.
At ING Bank, the experts even consider it possible that the euro can fall to 0.75 dollars.
Investors' bets also speak a clear language: on the financial market, short bets against the euro are currently at their highest level for two years.
What should investors do?
That depends primarily on what further developments investors expect.
If, like many professionals, you assume that the trend will continue, it makes sense to give the non-euro area a higher weighting in the portfolio.
In other words: for example, buying shares in US companies or investing in commodities that are usually traded in dollars.
A dollar account with cash holdings is also a way to benefit from further US currency appreciation.
"Every investor should also hold some dollars," explained fund manager
Klaus Kaldemorgen
(68) from DWS recently to the "Handelsblatt".
"The world's most important reserve currency offers crisis protection - the strong dollar has recently brought investors from Europe returns."
However, it is important not only to look at the currency, but also to be convinced of the investment itself.
"As an asset manager, I buy stable US stocks for the offensive depots," says
Lothar Koch
, head of portfolio management at GSAM + Spee Asset Management AG in Krefeld.
"I parked some of my liquidity in US overnight money. In addition to the currency gain, overnight interest rates are rising in the US."
"I buy stable US stocks for the offensive portfolios"
Lothar Koch
, Head of Portfolio Management
"We have meanwhile heavily underweighted the euro area and prefer stocks and bonds in US dollars, Canadian dollars, Swiss francs and British pounds," agrees
Frank Ringelstein
, managing director of the asset manager Ringelstein & Partner in Essen.
The good thing about it: If the exchange rate expectation is met, investors even make profits if the actual asset performs rather moderately.
A look back proves that, as
Marc Ospald
from the asset manager Habbel, Pohlig & Partner in Wiesbaden explains.
For example, he refers to the price of gold, which – measured in dollars – has been rather disappointing over the past twelve months.
No wonder: Gold is becoming less attractive when interest rates are generally rising.
In addition, the precious metal, which is traded in dollars, automatically becomes more expensive for buyers who do not calculate in the US currency when the dollar rises.
Conversely, the exchange rate effect makes gold attractive for local investors.
"US investors have recorded a loss in value of gold of around minus 3 percent since the beginning of the year," says Ospald.
"Local investors, however, an increase of 9 percent in euros."
The situation is similar with US stocks, according to the investment professional.
"
"There won't be much room left for the euro to go down"
Uwe Zimmer
, asset manager
On the one hand.
On the other hand, investors should also critically question this apparently simple investment case.
For example, how certain is it that the euro will actually continue to fall?
"There won't be much room left for the euro to fall,"
Uwe Zimmer
, managing director of z-invest in Cologne, points out.
"If the ECB hikes rates or the Fed cuts them, it goes the other way."
In addition, a differentiation must also be made with US stocks - not all of them benefit to the same extent from the dollar's strength.
"US companies that generate a large part of their sales abroad are suffering from the strong dollar because these earnings are worth less in local currency," explains
Christopher Lindken
from GAP Vermögensverwaltung in Cologne.
"These companies include Microsoft and Apple, for example, which highlighted precisely this connection as a stress factor in their most recent quarterly reports."
According to Lindken, however, the situation is different for the large American energy exporters.
"They benefit from the fact that energy commodities, such as oil and gas, are paid for in dollars. This does not put these companies at a disadvantage when they export their products abroad."
