An aggressive move pushed the euro, the battle with the dollar continues



by   |  VIEW 296

An aggressive move pushed the euro, the battle with the dollar continues

Recently, the euro exchange rate dipped below one dollar for the first time in 20 years. But after the ECB's interest rate hike, the euro strengthened against the US currency by more than 1 percent and is stable around the $1.02 level.

In global markets, the dollar's value against a basket of currencies fell from a 20-year high last week, with the euro gaining more than 1 percent after the European Central Bank raised interest rates more aggressively than expected.

The dollar index, which shows the movement of the US value against the other six most important world currencies, slipped last week by 1.2 percent, to 106.70 points. At the same time, the dollar fell 1.3 percent against the European currency, so the price of the euro reached $1.0215, close to the highest level in two weeks.

The dollar exchange rate also fell against the Japanese currency, by 1.7 percent, to 136.10 yen. On Thursday, the European Central Bank (ECB) increased key interest rates for the first time since 2011, by 0.50 percentage points, while an increase of 0.25 percentage points was expected.

Thus, key interest rates for bank refinancing were raised to 0.5 percent, interest on overnight loans to banks to 0.75 percent, and interest on deposits to zero percent. "The Governing Council decided that it is appropriate to take a larger first step in the pace of (monetary) policy normalization than was signaled at the previous session.

The decision is based on the updated assessment of the management council on inflationary risks," the statement said. Higher interest rates should lead to a decrease in inflation towards the target of 2 percent. Inflation in the eurozone rose to 8.6 percent in June, the highest level since the European Statistical Office began publishing data in 1996.

Inflation will remain undesirably high for some time due to continuous pressures on energy and food prices, and it is further fueled by the weakening of the euro, ECB leaders said. An additional reason for raising interest rates is the new bond purchase program designed by the bank to reduce the difference in borrowing costs among eurozone members.

The gap widened sharply after the bank announced an interest rate hike in June. The ECB has therefore decided to buy bonds of countries whose financing conditions have worsened disproportionately to specific basic indicators in order to mitigate unjustified and chaotic market dynamics, the central bank's leaders said.