Zhang Ming: Why does the exchange rate of the euro degrade sharply?

Zhang Ming/Wen

In the past year, the US dollar index has been soaring. From the end of May 2021 to the end of August 2022, the US dollar index rose from 89.79 to 108.70, an increase of up to 21.1%. In the US dollar index, the euro weight is as high as 57.6%. Therefore, the image of the US dollar index strongly appreciated is naturally a sharp depreciation of the euro exchange rate against the US dollar. From the end of May 2021 to the end of August 2022, the exchange rate of the euro against the US dollar fell from 1.22 to 1.00, a drop of 18.0%. On August 22, 2022, the exchange rate of the euro against the US dollar fell below 1 to 1, which caused high attention about all parties because this was the first phenomenon since December 2002. In other words, the exchange rate of the euro against the US dollar has fallen to a new low in nearly 20 years.

Why does the exchange rate of the euro against the US dollar depreciate sharply in the near future? Generally speaking, the reasons for the changes in the exchange rate of two currency include both the economic growth and inflation of the fundamentals, as well as the cross -border capital flow caused by changes in interest rates and asset price changes in the financial market. Reflected in the changes in international revenue and expenditure between the two countries.

First of all, from the perspective of economic growth, both the EU and the United States have experienced the economic recession under the impact of the new crown epidemic, and both have experienced a economic rebound under the stimulus of macroeconomic policies. For example, the year-on-year year-on-year growth rate of the EU and the United States has bottomed out in the second quarter of 2020, respectively, -13.8%and -9.1%, respectively. %. In the first and second quarters of 2022, the EU's quarterly GDP growth rates were 5.5%and 4.0%year -on -year, and the United States was 3.5%and 1.7%, respectively. In other words, the recent economic growth of the European Union is still slightly stronger than the United States.

However, from the perspective of forward -looking indicators, the prospect of EU economic growth is slightly weaker than the United States. For example, in July and August of 2022, the PMI index of the euro zone manufacturing industry was 49.8 and 49.6, respectively, weaker than the level of glory. In contrast, the PMI index of the United States is 52.2 and 51.5, respectively, both higher than the level of Rongku.

Secondly, whether it is the European Union or the United States, the recent strong economic growth has brought about tension in the labor market and rising inflation pressure. In July 2022, the unemployment rates of the European Union and the United States were 6.0%and 3.5%, respectively. Although the EU unemployment rate was significantly higher than the United States, this was the lowest unemployment rate of the two major economies since the 21st century. In July 2022, the inflation rates of the European Union and the United States reached 9.8%and 8.5%, respectively, respectively, respectively, and the highest inflation rates of the two major economies since the 21st century.

Again, from the perspective of cargo trade, since the beginning of 2022, the US cargo trade deficit has expanded first and then reduced, while the European Union's cargo trade deficit has continued to expand. For example, the monthly cargo trade deficit in the United States first expanded from US $ 99.4 billion in December 2021 to US $ 125.7 billion in March 2022, and then reduced to US $ 89.1 billion in July 2022. However, the European Union's monthly cargo trade deficit expanded from US $ 23.3 billion in December 2021 to $ 43.6 billion in June 2022. As we all know, the expansion of the trade deficit between the United States and the European Union is related to the rise in global commodity prices caused by the conflict between Russia and Ukraine. However, due to the import of imports of large -scale commodities such as energy and food, the dependence of large -scale commodities is much lower than that of the EU, resulting in the deterioration of the European Union's trade deficit of goods than the United States. For example, from January to June 2022, the average monthly growth rate of the European Union's monthly exports was 17.4%, but the month -on -year growth rate was as high as 48.3%. The EU's dependence on energy supply from Russia is very high, which is a direct reason for the significant expansion of the EU's cargo trade deficit.

Fourth, in response to the inflation of this round of inflation, there is a significant leader in the reaction speed of the Fed and the European Central Bank. On the one hand, the Federal Reserve raised interest rates 25, 50, 75, and 75 basis points in March, 4, and July in 2022. At present, the federal fund interest rate has risen to 2.25-2.50%. On the other hand, the European Central Bank announced that it was not until late 2022 that the three key interest rates would raise interest rates to 50 basis points. With 0%. It is not difficult to see that the difference between the current short -term interest rates in the United States and Europe has been significantly widening, which may trigger a popularity trading of the euro to buy US dollars, thereby lowering the euro exchange rate against the US dollar.

Finally, from the perspective of long -term interest rates, as of the end of August 2022, the 10 -year Treasury bond yields in the United States and the euro zone were 3.15%and 1.57%, respectively, and the interest margin between the two was about 160 basis points. Although long -term spreads seem to be large, this is basically the average level of long -term interest rate spreads in the United States and the euro zone in the past. In other words, the long -term interest rates in the United States in the past year have basically been synchronized with the rise in long -term interest rates in the euro zone.

In summary, the main reasons for the recent depreciation of the exchange rate of the euro against the US dollar in the near future: First, after the outbreak of the Russian and Ukraine conflict, the import cost due to the rise in commodity prices has increased, resulting in a significant expansion of the EU's goods trade deficit. The rhythm and amplitude are significantly ahead of the European Central Bank, which led to the rapid widening of the short -term spread of the United States and Europe. Third, the EU must lag behind the United States in terms of economic growth prospects reflected by the manufacturing PMI index. Will the exchange rate of the euro against the US dollar continue to depreciate? On the one hand, the rising price of commodities such as energy and other commodities will continue to the euro zone; on the other hand, at the central bank governor meeting held by Jackson Hall, Powell’s eagle means The interest policy, and the European Central Bank is likely to be more stable, which means that the short -term spread between the United States and Europe may continue to be high or even expand again.

Therefore, the author believes that the depreciation process of the euro exchange rate of the US dollar may not end, but the depreciation space will not be too large. The possibility of the recent US dollar index exceeded 110, and the exchange rate of the euro against the US dollar may be consolidated within a range of 1 euro against 0.85 to 1.05.

(The author is deputy director of the Institute of Finance of the Chinese Academy of Social Sciences, and deputy director of the National Financial and Development Research Office)

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