About a month has passed since the US dollar and Europe’s single currency, the euro, traded at a ratio of 1 to 1. Thus, both currencies reached parity after about 20 years, and the dollar seemed likely to continue the strengthening trend.
Different approach by Fed and ECB
Especially in the context of the differing approach of the Federal Reserve and the European Central Bank to fight inflation. While the Fed has been raising its interest rates for a nice line of months, the ECB only made its first hike in 11 years this July.
But the development of US inflation for July surprised. Consumer prices were unchanged compared to June, and year-on-year inflation even fell. The surprise was also consummated by the subsequent announcement of the Producer Price Index, which was down half a percent month-on-month in July.
The belief among investors was that the Fed would no longer be so severe in its anti-inflationary campaign. Especially conscious that the US economy has technically entered recession and further over-tightening of monetary policy could hurt it even more. The euro has thus strengthened by about four percent against the dollar over the past month and continues to gain ground. The dollar lost even against a basket of six major world currencies. About 1.5 per cent in the past week alone.