Frankfurt, Germany –The euro fell to its lowest level in a year against the US dollar after the United States released fresh inflation data on Wednesday. With persistent inflation and political changes in the US, analysts predict that the euro could face continued downward pressure against the dollar in the coming months.
US Inflation Data Pressures Euro
The euro-dollar exchange rate dropped to 1.0546 at 4:52 am CET on Thursday, marking its lowest point since November 2023. The latest October Consumer Price Index (CPI) report from the US revealed a month-over-month rise in inflation, further strengthening the dollar and weakening the euro. With a 5.7% drop in the euro against the dollar since September, this trend aligns with recent market concerns surrounding inflation and political changes in the US.
This pressure on the euro intensified following the recent Republican victory in the House of Representatives, giving former President Donald Trump’s party control over Congress. This political shift increases the likelihood of Trump-backed policies, which markets believe may further boost inflation risks and raise US government bond yields, thereby enhancing the appeal of the dollar.
US Inflation Remains Resilient
In October, US inflation rose by 2.6% year-over-year, an increase from 2.4% in the previous month. This marks the first inflation rise since March and signals that inflation pressures are persistent. Core inflation, excluding food and energy, also showed growth, with a 0.3% increase month-over-month and a 3.6% increase year-over-year. While the Federal Reserve had been expected to make a modest rate cut in December, this persistent inflation might influence its decision on interest rates.
Last September, the Fed cut rates by 50 basis points amid concerns over a slowing labor market. This initial rate cut weakened the dollar and pushed the euro to a 14-month high. However, with the US job market proving resilient and inflation holding firm, the dollar has since rebounded strongly.
Rising US Bond Yields Bolster Dollar’s Appeal
Rising inflation expectations have fueled an increase in US government bond yields, particularly for longer-term Treasury notes. As of this week, the 10-year Treasury yield reached 4.47%, its highest closing level since July 1. Short-term yields reflect immediate rate outlooks, while longer-term yields indicate broader economic expectations. This trend suggests that markets expect inflation and interest rates to remain elevated, further boosting the dollar.
Market strategist Michael McCarthy, COO of Moomoo Australia, sees the US dollar strengthening amid this bond yield increase. “The rise in Treasury yields could lead to continued demand for USD-denominated assets,” McCarthy commented. “Even as stocks lose some of their recent gains, the dollar’s momentum may accelerate.”
Euro Outlook: Weakness Amid Economic and Political Challenges
The euro faces ongoing pressure not only from US monetary trends but also from Europe’s economic challenges. The potential for trade disputes between the US and key trading partners, including the EU and China, could add more strain to the euro, which is already weakened by Europe’s slower economic recovery and political uncertainties.
Given these trends, a sustained recovery in the euro appears unlikely in the near future. European exporters may benefit from a weaker euro, but few indicators suggest that the currency will see a significant turnaround soon.
Stay tuned for continued updates on currency markets and economic shifts as inflation pressures, interest rates, and global trade policies evolve. Share your thoughts on how these trends may impact Europe’s economic outlook and the future of the euro.
