Euro close to record low against the franc and weak against the dollar

The euro is becoming increasingly weaker against the franc and the dollar. The European common currency is trading near its record low against the Swiss currency. On Friday evening, 0.9566 francs were paid for one euro, and on Thursday evening it was only 0.9524 francs. The euro was therefore not far from its low of 0.9502 francs, which it reached at the end of September last year.

The euro has also recently been significantly weaker against the dollar. On Thursday it reached its lowest level in six months at $1.0632.

At first glance this is surprising. The European Central Bank (ECB) finally increased the deposit rate by 0.25 percentage points to 4 percent on Thursday. It was the tenth increase in a row. At the end of July last year, the interest rate was still at -0.5 percent – so the ECB has tightened monetary policy considerably in the past few months.

Higher interest rates generally strengthen a currency – and many market participants did not expect the ECB interest rate increase on Thursday. “The reaction of the euro to the ECB’s interest rate increase on Thursday was surprising,” says Thomas Stucki, head of investment at the St. Galler Kantonalbank (SGKB). So what are the reasons for the euro’s weakness?

Economy in stagflation

The dollar is benefiting from the fact that the American economy is holding up relatively well, says Stucki – even though a downturn has been expected for some time. The franc has also gained against the euro because the Swiss National Bank continues to be active on the market and sells foreign currencies.

Above all, there is a whole cocktail of news about the euro zone and the euro that is weakening the European common currency. These are the following:

Investors do not expect further interest rate increases: First of all, the euro was probably weakened by the fact that the ECB representatives announced that no further interest rate increases were planned for the time being. Many investors are now assuming that interest rates will remain unchanged for a longer period of time – the “interest rate peak” has therefore been reached.

On Friday, according to agency reports, ECB Vice President Luis de Guindos said in a radio interview that recent increases in interest rates in the euro zone – if sustained for some time – should be enough to bring inflation closer to the ECB’s 2 percent target . According to the Bloomberg news agency, financial markets have already priced in around three quarter percent interest rate cuts in 2024 during ECB President Christine Lagarde’s speech on Thursday.

Economy in stagflation: The poor economic situation in the euro zone is also weakening the common currency. It is currently suffering from the phenomenon of so-called stagflation. This linguistic structure is a combination of the words stagnation and inflation. While the economy is not getting anywhere, inflation remains high. In August, inflation in the euro zone was still 5.3 percent.

“Stagflation is the worst of all possible combinations,” says Karsten Junius, chief economist at Bank J. Safra Sarasin. “But we have to prepare for a few quarters of stagflation in the euro zone.” Inflation is likely to remain too high in the coming period. Among other things, the strong demand for workers prevents wages from falling – which in turn keeps inflation high. Deglobalization, demographic developments and climate change could also increase inflationary pressure.

Weak economic situation in Germany: The difficult situation of the German economy also plays a role. The country was recently treated as the “sick man of Europe” again, even though the economy was actually supposed to be the driving force for the euro zone. The German economy has lost competitiveness in recent years, and high energy prices are putting a strain on industry. In addition, the German economy is dependent on demand from China.

Economic crisis in China: The crisis in the Middle Kingdom is also putting a considerable strain on the economy in the euro zone. The Chinese economy is suffering from a real estate crisis. The real estate developer Country Garden came close to default on several occasions, and Evergrande, which also operates in this sector, filed for bankruptcy protection in the United States in August.

The real estate sector accounts for a large part of China’s economic output. Junius believes a strong economic recovery in China is unlikely. He points out that monthly lending fell to a 14-year low in July this year.

A burden for the Swiss economy too

The poor development in the euro zone is also not good for the Swiss economy. Switzerland’s real gross domestic product (GDP) was 0 percent in the second quarter of this year. Swiss industry was hit hard and felt the slump in markets such as China and Europe. Against this background, the question arises as to whether the Swiss National Bank (SNB) will further increase key interest rates on September 21st.

How should savers and investors act in the current environment? Junius is currently cautious about stocks. The economic headwind is likely to increase until the end of the year, as the upswing in the USA is likely to lose momentum. Many stocks are expensive at current price levels.

When it comes to stock investments, he currently prefers defensive markets such as Great Britain or Switzerland. In defensive stock markets, stocks that are less dependent on the development of the economy are heavily weighted – for example, stocks of pharmaceutical or food manufacturers.

In the first half of the year, cyclical, i.e. cyclical, stocks performed better than defensive ones. The Safra-Sarasin chief economist recommends avoiding stocks from the euro zone, even though they are often cheaply valued. This is due to the weakening economic cycle in Europe and China.