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The Risk of Euro Depreciation

The year 2019 is not looking great for the Euro. However, the USD, is witnessing a historic increase in its acceptance among investors. The Dollar remains one of the strongest currencies in the world (strength is measured by percentage yield). There are many factors involved in this power play. Here are some of the factors that might be causing the Euro’s growth to slow down against the Dollar and lose its momentum in the market.

Lower Interest Rates:

One of the most crucial reasons for this slowdown in the Euro’s value is its low-interest rate, and the ECB has no plans to increase it in the near future. In fact, they are actually preparing for the market to adjust to a low-interest rate for a longer period time than initially anticipated. This experiment of the ECB is costing the Euro a lot in terms of its market value and acceptance amongst investors both domestic and abroad.

Because the USD and EUR directly compete in many markets, a higher interest rate of the USD makes it a more popular option than the Euro. It really benefitted the Euro previously when the ECB increased the  Euro's interest rate. The Euro even began to recover from the negative impacts of the recession. Those benefits seem to have faded away almost completely now.

Some Economic Factors:

You can understand the state of any currency by looking at some of the main economic indicators. Currently, those indicators are not projecting a very bright future for the Euro. The Purchasing Managers’ Index fell by 0.8 points and to 52.5 in April. The manufacturing sector, however did show an improvement, jumping 0.3 points to 47.8. However, 50 is the barrier level that differentiates between a contraction and an expansion, so unfortunately 47.8 still doesn't reflect a growth economy. 

Increasing Inflation:

The key inflation in the Eurozone increased from 0.4% to 1.2%, but this is justifiable as the prices increased due to the Easter holiday which happens in April. The ECB has responded negatively to this hike. They have stated that they will only increase the interest rate if inflation grows to above 2%. This move could prove counterproductive. The ECB further announced that they have no plans to increase the inflation rate until 2020 at the earliest.

The US Economy:

Another factor causing hard times for the Euro is the US economy's booming performance. The US has had a government shutdown, various trade conflicts with countries like China and Turkey, and also  faces the same economic downtime as the rest of the world. Yet the US economy has performed surprisingly well. Their economy showed a record-breaking 3.2% growth as compared to the last quarter of 2018 (2.2%).

Employment Rate of the US:

The employment rate in the United States showed some bad signs earlier this year in February. At the time this indicated a possibility of a recession. However employment rates quickly turned around, reaching record surges(around 190k in March and 265k in April). The number of temporary health workers also saw a record high. 

Dollar Fails to Depreciate:

The USD has failed to depreciate in even the hardest of its economic times. There was a time when an interest rate cut was possible, and even then, the dollar continued to gain strength. An interest rate cut might prove beneficial for the Dollar because the interest rate on Euro is already negative.

These are some of the main factors that are holding the Euro back and preventing it from strengthening. The ECB needs to take immediate measures to prevent any further depreciation. Things like an interest hike can easily put the Euro back on the track against USD.