The euro's exchange rate to the US dollar is approaching the parity but it is difficult to say

In the year, the euro performance can only look at the "face" of the dollar

On July 15, the exchange rate of the euro to the US dollar closed at 1.0085, a total of 11.3 % since the beginning of the year, approaching the level of parity. From July 12th to 14th, the euro exchange rate fell below 1 for three consecutive days, a new low since the end of 2002. The US dollar index rose steadily and comprehensively crushed the euro, pounds and yen. The cumulative increase of 12.9 % from the beginning of the year to July 15th, a 20 -year high. During the same period, the US dollar contributed 56 % of the US finger increase to the appreciation of the euro exchange rate.

The spread of the attraction of asset prices between the country has an important impact on the exchange rate trend, but there are two "paradox" in the important interest rate of the United States and Europe. The first is the narrowing rate of 10 -year Treasury bonds of Virtue and did not save the euro decline. Since the beginning of this year, the US -European Treasury yields have risen sharply, and the 10 -year US bond yield has exceeded 3 %. After May, the US debt fell, and the virtue spread gradually narrowed. On July 15th, 36 basis points fell from the high point in April, and during the period, 59 basis points fell. Secondly, the curve of the US debt yield curve and the curve of German debt yields are steep. After the 10 -year and two -year spreads of the US bonds fell in April, the curve of the US debt yield rate was further flat. It started to hang upside down on July 6th. The difference is equal; the difference between 10 -year and 2 -year yields of German debt is close to 100 basis points.

On the surface, the expectations of US transactions are expected to be in line with European transactions, which is more consistent with their respective economic status. The U.S. economy is entering the slowing stage from overheating. In the first quarter, the actual GDP growth was negative. In the second quarter, PMI, durable goods orders and consumer confidence and other indicators were further weakened. The market speculates that the US economy may even enter technological recession. The European economic recovery was not as strong as the United States. The euro area was severely damaged by the epidemic. Last year, the amount of economic physical property had not returned to the level before the epidemic. It is the main victim of input inflation, and the Ukraine crisis has significantly increased its risk of stagnation.

However, high inflation is a global phenomenon. If the US economic recession has caused global energy prices to fall, Europe may quickly switch from stagnation model to decline. In this way, the German debt yield curve is not a simple stagflation transaction. In fact, it may be that international capital is not optimistic about European prospects. The risk aversion to the United States has triggered two "paradoxes" in the bond market.

Looking further, there are still three "stubborn diseases" in the euro. The first is the loosening and debt distribution of the European Union. As the southern European government's leverage is significantly higher than that of Northern Europe, as long as the currency tightening cycle is entered, the hidden dangers of the European debt crisis will appear again. Once the economic growth has declined and the fiscal passive contraction meets, economic problems may cause social problems. This leads to the second "illness", and European integration lacks the foundation of political integration. The European Union is more like an alliance of a country, not the Federal country in the United States. If the people in the southern European countries cannot withstand high inflation and the decline in welfare, the society will be turbulent and will further crack down on the euro. Recently, as the "Five -Star Movement" party refused to support the Italian government to help the people respond to the rising solution of energy and living costs, the internal differences of the ruling alliance were exposed, and Prime Minister Dragig wanted to resign. The third is that the Russian conflict is not the final say in Europe, and Europe has been riding tigers. Natural gas accounts for 25 % of the total energy consumption in Germany, and 55 % of Germany's natural gas comes from Russia. Although the European Union advocates the urgency of energy to relieve Germany, it is not easy for the energy structure adjustment to adjust in the short term. In particular, people who do not have subsidy capabilities are unbearable to endure natural gas to Germany under high prices, which further increased the second "stubborn disease". Recently, Beixi No. 1 natural gas maintenance, the German energy giant was forced to misappropriate winter gas storage, which led to a decline in the level of gas storage again. There was a large uncertainty of how to overwhelm the winter this year.

The euro performance can only look at the "face" of the dollar. The euro has failed to prevent Europe's full world from buying energy. By May of this year, the EU has been in the 10th consecutive month of trade deficit. In the month, the first quarterly default deficit of 10 billion euros in Germany had appeared in Germany. If the EU's often deteriorates the deficit of the EU, it will further exacerbate the pressure of the euro depreciation. Therefore, the euro "turning" is likely to wait for the dollar to turn.

Curbing inflation is currently a major event in the Federal Reserve. The US CPI in June exceeded expectations, an increase of 9.1 % year -on -year. The strong non -agricultural data and retail data in June gave the tightening buffer pad that caused decline, making the Fed unable to turn around easily. Fed officials, including Powell, have repeatedly stated that they can only return to a reasonable range by seeing the trend of inflation. Considering the base effect and the leading indicators of housing prices, the US CPI may still be stubborn in the third quarter, and it becomes particularly important in the fourth quarter. The Federal Reserve's unprecedented radical tightening and the European Central Bank's considering tightening were made.

Risk aversion will also support the US dollar. At present, the Fed's tightening either defeats the domestic demand of the United States, or attracts the return of the US dollar to the crisis of overseas debt. U.S. Treasury yield curve inversion has been defined by the market as the Federal Reserve to create a global economic recession and guide demand for shrinking to balance the pressure of high inflation. Once the US dollar liquidity crisis has evolved into financial systemic risks and rapid economic contraction, risk aversion will concentrate and release, pushing the US dollar to fall. Since the strengthening of the US dollar has not forced the Federal Reserve to turn, let the bullets fly for a while.

(The author is the Global Chief Economist of BOC Securities) Seated in 2022.7.25 Total Issue 1053 "China News Weekly" magazine

Magazine title: The euro exchange rate to the US dollar is approaching the parity but it is difficult to say

Author: Guan Tao

Capture: Xiao Ran

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