The euro continues its slide: on Tuesday the exchange rate was below 1.14 dollars.

On Monday evening, the euro fell to $ 1.1357, its lowest level since July 2020.

The different approaches of the central banks in the fight against inflation have been weighing on the euro for a long time.

At the beginning of June, the euro exchange rate was still above $ 1.22.

While the American Federal Reserve (Fed) has announced its exit from the ultra-loose monetary policy by curbing its bond purchases, the European Central Bank (ECB) is still ready to stick to its expansionary course.

Markus Frühauf

Editor in business.

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On Monday, ECB President Christine Lagarde reaffirmed her view that higher inflation is a temporary phenomenon and can be attributed to rising energy prices and supply bottlenecks.

Lagarde still does not expect a wage-price spiral in Europe.

It can rely on the continued low inflation expectations in the market, which are significantly lower than the inflation rate of 4.1 percent in the euro area in October.

Based on the five-year inflation swap, investors expect price increases averaging just under 2 percent.

Biden puts pressure on

They are thus in line with the ECB, which is pursuing an inflation target averaging 2 percent in the medium term. The Fed has a similar goal. In the United States, investors are currently expecting inflation at 2.6 percent, which is also significantly lower than the most recent inflation rate of 6.2 percent. The high American inflation had recently put the euro under further pressure because investors now believe that the Fed will raise interest rates in the coming year as more likely. American President Joe Biden, who a few days ago gave top priority to fighting inflation, is creating additional need for action.

On the other hand, ECB President Lagarde denied market expectations, according to which an interest rate hike would be possible in the second half of 2022.

It is unlikely that the conditions for an interest rate hike will be met in 2022, she confirmed before the European Parliament in Brussels.

Together with the robust economic figures from the United States and the tense corona situation in Europe, the euro is therefore coming under increasing pressure.

In addition, there is solid economic data from the USA and the tense corona situation in Europe.

Higher US yields give dollars a tailwind 

The current developments on this side and the other side of the Atlantic are too different and since that will probably not change for the time being, the euro is likely to remain under devaluation pressure, expects Commerzbank analyst You-Na Park-Heger.

The analysts at Unicredit assess the prospects for the euro exchange rate in a similar way.

The dollar is also getting a tailwind from its interest rate advantage.

The ten-year yield on US government bonds was 1.606 percent on Tuesday, while that of the ten-year federal bond was down 0.234 percent.

This means that safe dollar investments have an interest rate advantage of 1.84 percent.

The lead has recently increased again.

However, in the spring this was at times even over 2 percent and at the same time the euro was stronger at a good 1.20 dollars.

Blackrock strategist Martin Lück expects the inflation figures to remain high longer than initially expected, but not translate into a wage-price spiral, especially in Europe.

For him it is crucial that the central banks react less strongly to the current inflationary hump than in the past, so that real interest rates remain extremely low.

“This helps ensure that the outlook for real forms of investment, including stocks, gold or real estate, remains positive even with increasing headwinds,” says Lück.