Recession fears cause the euro to fall sharply

Fears of a recession have sent the euro to a 20-year low against the dollar. Fears of recession and the depreciation of the euro are further fueling speculation about a more cautious rate hike by the European Central Bank.

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At the time of writing, the euro was worth USD 1.0304, down from USD 1.0428 a day earlier. This is the lowest level since December 2002. The ECB has indicated it will raise interest rates by 0.25 percent later this month to combat high inflation. It would be the first rate hike in more than a decade. The central bank has hinted at further interest rate hikes in the coming months.

The depreciation is significant compared to the end of 2020, when the euro could fetch more than $1.20. In the United States, the Federal Reserve has already begun a sharp rate hike to curb inflation. As a result, the interest rate differential between the US and the euro area widens further. Higher interest rates in the US make the dollar more attractive against the euro, causing the euro to fall in value.

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Consequences of High Interest

While high interest rates control inflation, it can also limit economic growth and even cause recession. This puts the ECB in a difficult position as high inflation puts pressure on consumers’ purchasing power. As a result, they are very careful with their spending.

Fears of a recession in the euro zone were further fueled on Tuesday after it emerged that euro area services sector growth fell to a five-month low in June.