The euro is likely to rise further as a safe destination due to the jittery sentiment amid the global market turmoil. The ECB’s September rate decision remains a key factor in determining the single currency’s trend.
The euro has recently surged amid global market turmoil, being viewed as a safe haven currency. The exchange rate between the euro and the US dollar spiked to 1.1 on Monday, the highest level since January, before retreating to just above 1.09 on Tuesday.
These movements reflect global sentiment: a risk-off environment boosted the euro during the stock market meltdown, while a risk-on sentiment applied downward pressure on the single currency following a market relief rally. However, the euro may face further upward pressure given the prevailing global trend.
Euro reclaims status as safe-haven currency
Historically, the euro has been regarded as a safe place for investors’ money due to its high liquidity, status as a major reserve currency, the Eurozone’s sizable economy, and the stable policies of the European Central Bank. However, this perception of safety may have been undermined by the Ukraine war, a sluggish economic outlook, and recent political turmoil. Despite this, the Eurozone remains a crucial part of the global economy. Recently, the euro has regained its status as a safe haven amid market turmoil, spurred by a surging Japanese yen and a sharp decline in US stock markets.
Market volatility likely to persist
Despite a broad rebound in global stock markets, volatility may persist as fundamental conditions remain unchanged. This could further support the euro as a safe-haven asset.
The recent intense sell-off in equity markets was triggered by a sharply strengthened Japanese yen following the Bank of Japan’s (BOJ) rate hike last week. Currency traders have been unwinding “carry trades”, leading to a reversal in the yen and a decline in the higher-yielding US dollar.
A currency carry trade involves borrowing in a currency with a low interest rate and investing in one with a higher interest rate, aiming to profit from the interest rate differential. Investors have been borrowing yen at lower rates to fund equity investments, so the yen’s recent reversal has contributed to the global stock market sell-off.
It is too early to conclude that volatility has ended. The BOJ is expected to continue its monetary tightening, not only by raising interest rates but also by reducing its bond purchases. This is likely to lead to further repatriation of yen, as many Japanese businesses, burdened with high debt, will need to repay their loans. This trend could continue to pressure the US dollar and boost the euro, as well as currencies less affected by global trends, such as the Australian and New Zealand dollars.
The ECB’s next meeting in focus
Not only global trends but also the ECB’s interest rate path are key factors influencing the euro’s movement. Eurozone inflation unexpectedly accelerated to 2.6% in July, up from 2.5% the previous month, which has dampened expectations for a second rate cut by the ECB in September. Signs of an economic recovery in the Eurozone could also attract capital inflows, as investors seek stability amidst ongoing market volatility.
In contrast, the US Federal Reserve is widely expected to begin reducing its interest rates in September as recessionary fears mount amid recent softened economic data in the country. Market participants expect that recent market turmoil will also prompt the Fed to implement three rate cuts this year, leading to a further decline in the US dollar.
As a result, a softened US dollar and a retreating US stock market could further solidify the euro’s status as a safe-haven currency. The euro’s appeal as a stable asset during times of global uncertainty may be reinforced by its relatively strong performance compared to other currencies.