The US dollar strengthened but not only thanks to the US economy

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The US dollar (USD) exchange rate strengthened against other world currencies and in particular against the single European currency (EUR). On July 25, 2019, at 9:34 am CET, the EUR/USD currency pair traded on the Forex market at a mutual exchange rate of US$ 1.1128 per EUR with the daily USD appreciation of + 0.10% of the exchange rate against EUR.

The US dollar thus strengthens its exchange value, less than a week before the meeting of the US Central Bank’s FOMC (Federal Open Market Committee), which could reduce interest rates in the United States. According to economic reporters and analysts, it is expected that it will be reduced by 25 basis points, which would represent a future reduced interest rate in the US ranging from 2.00 to 2.25% p.a. This two-day meeting will traditionally take place on 30 – 31, July, 2019 in Washington, DC.

However, according to financial strategists, as well as signals sent by senior officials of the European Central Bank (ECB) – including its current chief Mario Draghi – the ECB is also planning to cut interest rates. The original plan was that by the spring of 2020 the ECB rates will remain unchanged. However it now appears that the Governing Council of the ECB could modify the current negative interest rate by at least another 10 basis points down to – 0.50% p.a., with a re-launch of the quantitative easing program (QE EUR) with the aim of increasing the inflation rate and achieving a target of at least around 2% year-on-year as, projected by the ECB.

The ECB could discuss this rate cut very soon, but strategists and economists claim it is much more likely that it will pave the way for interest rate cuts and further easing at its September meeting. The ECB meets before the Federal Reserve System’s (Fed) expected vote, which is expected to cut rates and launch a new cycle of interest rate cuts. “I think [the ECB] is going to lay out a framework for doing more in the way of rate cuts and quantitative easing, in keeping with what [ECB President Mario] Draghi said at the Sintra conference,” said Rick Rieder, BlackRock‚Äôs CIO of Global Fixed Income. “They are going to do whatever it takes to try to stem some of this disappointment around inflation and growth,” Rieder added.

The exchange rate of USD is currently an interest to a significant number of analysts, including the economic editors of the prestigious Financial Times (FT). The Financial Times is paying attention to the weak US dollar which is what the Trump administration wants. FT say that even if they try, it will be difficult to weaken the USD. US growth and bond yields converge to the rest of the world, but the US dollar is still strong, although the appreciation rate has slowed. Sustainable depreciation of the dollar needs the rest of the world to grow faster than the US, which, however, gets us to the main engine of world growth, namely China. Global growth cycles (three all together since the Great Recession) were all triggered by Beijing and linked to a credit boom. After each such cycle, the dollar was slightly weaker.

Neither the Fed nor the US Treasury can bring the USD to the level they want. It is the result of a series of variables. The most important of these is growth in the rest of the world. Unless the global growth remains massive in the rest of the world, the US dollar will remain solid as a rock, the FT study says. Similar conclusions are confirmed by the outlook for global GDP growth prepared by Deutsche Bank analysts, where overall global GDP growth is 3.2% against 2.5% of GDP in the US, but EU countries, as a highly developed market, report their GDP growth for the Eurozone 1.1% and Germany even only 0.7%, Italy 0.3%. The economy of the Russian Federation also does not show a significant GDP growth at 0.9 percent. By contrast, the Asian economy, China and India in particular, set the pace of global growth, with China reporting 6.2% and India even 6.5%. In general, analysts say that the global economic downturn is helping USD growth.