In recent days, the dollar dropped below 4 PLN, only to spring back above this level. Surprisingly, despite expectations of the dollar decreasing this year, the American currency continues to be resilient. Much depends on which one will cut rates first—USA, or Europe. In the long run, the dollar will weaken, which means that Polish vacation trips outside of Europe should be cheaper.
Over the last 7 days, the US dollar rate decreased from 4.06 PLN to 3.98 PLN. Now it has bounced back over 4 PLN, although it will probably soon drop below this line again. Despite high expectations concerning the drop of the dollar value this year, it remains resilient. The EUR/USD rate is currently 1.09 and the future dollar rate in Poland will depend on the mutual relations between the Euro and the dollar. American assets remain attractive to investors, both in terms of American stocks and bonds, the profitability of which stabilized after drops in the fourth quarter of last year. In recent days, the S&P500 index reached its historical maximum. This signifies an influx of capital across the ocean and stabilizes the dollar rate.
The EUR/USD rate in the coming months will be shaped by expectations about interest rate cuts in the USA and Europe. The markets expect the cuts to occur in the first half of the year. Until recently, it seemed that the first cuts would occur in Europe, which is grappling with economic stagnation and even recession in some countries. However, recent comments from the ECB suggest that rate cuts may be delayed until the third quarter. The market predicts, according to the most likely scenario, the first rate cut in the USA will occur in May, and by the end of the year, rates will drop by 1.25 percentage points. Rate cuts will make investment conditions in the USA worse, thereby weakening the dollar. Therefore, the current situation shows that a weaker dollar should arrive before the holidays, and a stronger Euro and Zloty should help lower the prices of Polish people’s vacation trips outside Europe.
The PLN (Polish Zloty) rate against the dollar also depends on local factors. One of them is a very high level of political uncertainty and a feeling of chaos. In a situation where most Poles have serious trouble keeping up with the changing political situation, foreign investors who have an even tougher task, remain relatively stable. This lack of sharp movements in terms of the Zloty means that global investors, despite the feeling of chaos, have confidence in the actions of the current government and believe that it will strengthen the level of the rule of law and will favor fiscal consolidation (even despite the increased level of budget spending arising from fulfilling election promises).
The inflow of money from the European Union – from the Operational Program Infrastructure and Environment (OPIE) and cohesion funds also matter to the Zloty. Recently, the European Commission communicated the unblocking of cohesion funds for Poland, yet the market has already taken into account the improvement in relations with the European Union. The Zloty may benefit from information that, despite tight deadlines, Poland will be able to use most of the money from the OPIE. It seems that we should not count on the strengthening of the Zloty related to the exchange of funds from the EU on the foreign exchange market, because most of this money will be exchanged at the Central Bank of Poland (NBP).
Decisions about cautious interest-rate cuts in the USA should be beneficial for the dollar in the next few months and will also be well received by stock market investors. This is due to the good employment situation in the US and the decline in inflation. In the short term, the dollar will remain resilient, though it will probably weaken against the Euro and Zloty later on.
Paweł Majtkowski, eToro analyst in Poland.
