Global | The recent strength of the euro

Summary

Over the past six months, the euro has experienced a significant appreciation against the dollar, from lows below parity last fall to levels of around 1.10 in recent weeks. This somewhat expected appreciation has come sooner than anticipated.

Key points

• Key points:
• One of the main factors driving the euro's appreciation is that the European economy seems to be overcoming the impact of the energy shock caused by the war in Ukraine, as the energy price environment has ultimately proved better than expected once it became clear that there would be no shortage of gas this winter.
• At the same time, another driving factor has been the narrowing of the spread between US and German bond yields, reflecting how the market is adjusting to the growth outlook in Europe, and the slower momentum of interest rate hikes in the US.
• In addition, there is growing speculation that the US recession in the second half of the year could prove somewhat more severe than expected, amid fears of another financial crisis in the wake of the collapse of Silicon Valley Bank.
• In the second part of 2023, macroeconomic fundamentals—namely the intensity of the possible US recession, the end of the interest rate hike cycle of central banks, and how long the hiatus before cutting rates will last—will determine currency movements.

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