According to analysts at Goldman Sachs, the Euro was meant to reach parity with the U.S. Dollar by Christmas last year. That didn’t happen, however, and the closest it got was 1.0458.
Sitting at 1.0827 at the time of this writing, some pundits have opined that this year may be the year that we’ll see the two currencies finally reach parity. The European Central Bank seems to be helping that happen.
Last week, the ECB, led by Mario Draghi, released a statement leaving its deposit rate unchanged at -0.30%. Noting that “downside risks have increased again,” Draghi defended the central bank’s decision while its effects pushed the Euro down to its lowest point in six weeks.
This week, Draghi once again defended himself against critics, arguing that meeting the central bank’s objectives is about credibility. “If a central bank sets an objective, it can’t just move the goalposts when it misses it,” he said in a speech in Germany.” But with Eurozone inflation currently at 0.2% (compared with the ECB’s goal of 2%), reaching that goal seems improbable.
That said, it may be more likely that the ECB will look to revise its policy stance in March, potentially driving interest rates even lower to reach its goals, which will push the Euro lower against the Dollar.
The dollar’s strength
As the ECB’s moves continue to put downward pressure on the Euro, monetary policy in the United States seems to be having the opposite effect, pushing the value of the U.S. Dollar higher.
Last month, the U.S. Federal Reserve, led by Janet Yellen, made the decision to increase the federal funds rate by 0.25%. It was the first time the Fed had increased the rate in six years, and it did so because of signs showing that the United States’ economy’s recovery has been strong enough to warrant an interest rate hike.
As Yellen discussed in her statement last month, the Federal Reserve will look to potentially increase the federal funds rate again in 2016. Some analysts predicted it could happen up to four times this year, but that was last year. The current state of the global economy paints a much bleaker picture for the Fed to consider.
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