Unlike the volatile stock markets, the foreign exchange market has remained stable this week. However, stability in this context means an unprecedented level of pressure on the U.S. dollar. Since Monday morning, the EUR/USD exchange rate has risen by 3 cents, reaching its highest level in four months. This favorable market trend is increasingly benefiting the Polish złoty.
The Dollar in a Tight Spot
The situation for the dollar on the foreign exchange market has shifted dramatically. As recently as January, at the beginning of Donald Trump’s term, there was speculation about when the EUR/USD exchange rate would reach parity—meaning one euro would be worth exactly one dollar. However, March has arrived, and like Caesar, the dollar has suffered blows from multiple directions. As promised, the U.S. president has launched a trade war, which economists and analysts predict will lead to higher inflation in the U.S. while simultaneously slowing economic growth. Signs of weaker economic prospects are already evident in business sentiment sub-indices (ISM) and the worst ADP labor market report in three years.
Investors are now focusing on the anticipated slowdown in U.S. GDP growth and are betting on a scenario in which the Federal Reserve will be forced to cut interest rates. This expectation is reshaping the dynamics of the world’s most significant currency pair. A faster pace of monetary easing will inevitably weaken the dollar’s position, especially considering that the ongoing cycle of rate cuts in the Eurozone has already been largely priced into the market. Additionally, in the current unpredictable environment, tomorrow’s rate cut by the European Central Bank is expected to have a hawkish tone, meaning that policymakers will be more cautious in predicting further rate reductions, which benefits the euro in the medium term.
Euro Is Back on the Rise
The euro’s strength is not only driven by expectations of ECB policy moves or the dollar’s weakness but also by significant internal developments within the European Union. The European Commission has announced an €800 billion support package aimed at strengthening Europe’s defense capabilities. This initiative involves further issuance of joint European debt, which, in the face of current geopolitical threats, is expected to enhance the bloc’s integration.
Germany, once the most vocal critic of shared European debt, is undergoing a significant transformation. The new coalition partners (CDU/CSU and SPD) are likely planning to abandon the so-called “debt brake,” which limits Germany’s budget deficit to just 0.35% of GDP. In addition to military industry investments, massive infrastructure spending of €500 billion is planned. If these measures are implemented, they could significantly boost economic growth in Germany. The prospect of Germany returning to a growth trajectory is excellent news for the Eurozone and its currency—good news that the U.S. dollar is currently lacking.
A Crisis of Confidence in the USD
Beyond the previously mentioned factors weakening the dollar—slower economic growth and lower interest rates—there are additional elements at play. Not long ago, parity was widely expected in the EUR/USD market, leading many traders to place orders betting on that outcome. As the exchange rate continues to rise (potentially fueled by speculation from the opposing side), more and more short positions are being closed. This further pushes the rate higher, and some of these closed trades automatically convert into buy orders, providing additional momentum for the euro’s gains.
From a broader perspective, analysts are noting that the chaotic and confrontational approach of the U.S. government is beginning to impact how its currency is perceived. It is difficult to rely on a payment system tied to a country that treats its entire trading environment as hostile. In the long run, global trade may have to reconsider its dependence on the U.S. dollar, which could (though not necessarily) mark the beginning of the end of its dominance in the foreign exchange market.
As of Wednesday at 3:00 PM, the EUR/USD exchange rate stands above $1.073, the EUR/PLN rate is at 4.15 PLN, the USD/PLN rate has dropped below 3.87 PLN (a level last seen four months ago), and the CHF/PLN rate is just under 4.36 PLN (its lowest since July!).
Author: Adam Fuchs, Currency Analyst at Walutomat.pl
Source: Manager Plus
