Euro and U.S. dollar banknotes are depicted in an illustrative photograph taken on March 10, 2023. The euro has reached its highest level against the yen in 15 years and a five-week high against the dollar. This surge occurred after the European Central Bank (ECB) raised interest rates for the eighth consecutive time, with plans for further tightening to meet the euro zone’s inflation goal of 2 percent. The ECB increased rates by 25 basis points to 3.5 percent, the highest in 22 years. The bank’s staff has also revised their forecasts for inflation, excluding energy and food, for this year and the next, due to unexpected increases in the past. The inflation projection for this year has been revised to 5.1 percent. In a research note led by chief economist Mark Wall, Deutsche Bank stated that they expect a final 25-bp hike in July to achieve a terminal rate of 3.75 percent, with risks leaning towards further tightening. The recent press conference by ECB President Christine Lagarde had both hawkish and dovish elements. Lagarde confirmed a hike in July but deliberately refrained from setting expectations for September. As of the latest trading, the euro has risen by 1.1 percent to $1.0948 and touched a five-week high of $1.0952 against the dollar. Against the yen, it has increased by 1.2 percent to 153.52, reaching its highest level since September 2008. The ECB’s decision comes after the U.S. Federal Reserve left interest rates unchanged but indicated further rate hikes by the end of 2023. Fed Chair Jerome Powell stated that rate cuts in 2023 would not be appropriate. The Bank of Japan is expected to maintain its ultra-dovish stance and yield-curve control settings in their upcoming decision. The dollar, as measured by the dollar index against major currencies, has fallen by 0.8 percent to 102.11, reaching a five-week low at 102.08 earlier in the session. Shaun Osborne, chief FX strategist at Scotiabank in Toronto, predicts that the risks for the dollar point towards further losses and potential range lows. He suggests that the U.S. dollar may face challenges in the near future due to the approaching end of the global monetary policy cycle. After briefly recovering, the dollar trimmed its losses following unexpected data showing a 0.3 percent increase in U.S. retail sales for May. In addition, the U.S. Labor Department reported that initial claims for state unemployment benefits remained unchanged at 262,000 for the week ending June 10.
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