The value of the euro collapsed at the opening of international markets following the results of the European elections. The French president’s decision weighs heavily Emmanuel Macron to dissolve the lower house of parliament and hold early elections for the National Assembly. The single currency reached its lowest value against the dollar in a month, losing almost half a percentage point of value in just a few hours.
The trend of the euro against the dollar is headed towards parity also due to the different monetary policies of the two central banks. There ECB has lowered interest rates but the Fed does not appear to have any intention of following suit anytime soon.
The effect of the European elections on the euro
Following the result of the European elections, the value of the euro on international markets dropped significantly. Against the dollar, the international reference currency, the single currency lost around half a percentage point in value this morning. It is currently trading at $1.0736, at the lowest levels in a month. An expected but still significant drop after the election results in several European countries were adverse to the government forces.
The French situation is particularly sensitive. The Eurosceptic and far-right party National gathering he collected more than 31% of the votes, taking more than double the preferences of incumbent president Emmanuel Macron. Immediately after the release of the first exit polls, the presidency announced the dissolution of the National Assembly, the most important chamber of the French parliament, and the start of the process to achieve early elections as soon as possible.
The result of these consultations, combined with the advance of the far right in Germanywith AfD which reached 16%, becoming the second largest party behind the centre-right CDU, worries investors about the stability of the European institutions and of the single currency itself. But the trajectory of the value of the euro was already partly set.
Monetary policies and parity with the dollar
The euro is moving towards parity with the dollar in the medium term. There European Central Bank has in fact decided to reduce interest rates by 0.25% in light of the satisfactory inflation results at EU level, around 2% considered ideal, and of economic growth which in some areas, such as Italy, is struggling to maintain itself satisfying. Lowering interest rates is seen as a way to stimulate the economy, but it also has other consequences, particularly if other central banks do not follow the same monetary policy.
The Fedthe American central bank, has in fact announced that it won’t cut interest rates anytime soon. The USA still has relatively high inflation, but above all its economic growth has been much more significant than that of Europe. The US system does not seem to need a boost from the monetary policy of the Federal Reserve, which therefore prefers not to intervene and leave interest rates unchanged.
However, this means that, while the quantity of dollars on international markets will remain substantially unchanged, that of euros will begin to increase. This will lead to a greater supply of the single currency and consequently a decline in its value.
