European interest rate hike could bring short-term relief to euro

​The beginning of the monetary tightening process by the ECB (European Central Bank) should contribute to bringing some relief to the exchange rate of the euro against the dollar in the short term.

Market experts believe that the increase in yields offered by European bonds tends to generate greater interest and a consequent increase in the flow of capital directed to the region.

On Thursday, the ECB raised Europe’s interest rate by 0.50 percentage point from -0.5% to zero, joining its global peers in raising borrowing costs. It was the first rate hike by the eurozone central bank in 11 years.

After the monetary policy decision on the Old Continent, the euro was down by 0.15% against the dollar around 1:45 pm, quoted at US$ 1.0176.

On July 12, the European currency, which had been on a path of weakening against the dollar for the last few months, reached parity against the American currency, something that had not been seen since 2002.

“From the moment the ECB starts the process of raising interest rates to try to stop the rise in inflation, this tends to relieve some of the pressure on the currency, as also happened in Brazil”, says the exchange manager at Treviso Corretora , Reginaldo Galhardo.

Market analysts do not expect, however, that the European bloc’s single currency will have the strength to register a strong appreciation against the dollar from now on.

The expectation is that, with the increase in interest rates by the ECB, the euro will be able to at least defend the one-to-one parity level against the US currency, but with no room to go much further than that for now, says Jefferson Rugik. , director of foreign exchange at brokerage Correparti.

“We are not going to see the euro return to trading at levels of US$ 1.10 or US$ 1.20 in the short term”, says the director of Correparti.

First of all, says Rugik, because the Federal Reserve (Fed, central bank of the United States) is also underway with its own monetary tightening process, started even before the ECB, and probably with another 0.75 point high. in the US interest rate at the July 27 meeting.

In addition to the dispute with the US Central Bank to control inflation in the respective regions, with the increase in borrowing costs and the attractiveness of securities from the point of view of investors, Galhardo, from Treviso, adds that the process of tightening monetary conditions has led to a risk of a sharp slowdown in global activity, with the possibility of a recession in developed markets.

And, once the scenario of a decline in activity in the major global economies is confirmed, Galhardo continues, the tendency is for the market to generally flee to assets considered safer, with the dollar being one of the main, if not the main alternative available. in the range of investors’ options.

Treviso’s foreign exchange manager also points out that Russia’s invasion of Ukraine, which has lasted longer than the market initially anticipated, increases economic agents’ risk perception in relation to investment opportunities in the Old Continent, compared to to the American market.

Austin Rating chief economist Alex Agostini says that, with the negative impact of the conflicts in Ukraine for the economy of the European continent, he does not rule out a scenario in which the euro weakens again against the dollar by the end of the year, coming to test levels around up to $0.90 over the next few months.

Agostini says that, although the ECB has started the process of monetary tightening in the region, it is not only the attractiveness of interest rates that makes investors move to a certain market to the detriment of another.

The economic health of the region in question is a key factor in defining the flow of capital between countries, says the chief economist at the rating agency.

“A higher interest rate doesn’t always mean there’s a good investment opportunity. Sometimes there are built-in risks that aren’t worth the risk,” says Agostini.

Real should continue to lose strength against the euro and the dollar

In the case of Brazil, Rugik, from Correparti, says that the tendency is for both the euro and the dollar to continue in the recent process of strengthening against the real.

In an international scenario that already has a series of uncertainties on the horizon, with global economic slowdown, high interest rates, war in Ukraine, and new mobility restrictions in China, the worsening market perception regarding fiscal risk and doubts about the conduct of economic policy from 2023 onwards should keep the real pressed against the currencies of developed markets, says the director of Correparti.

“The local market would need a new fact considered very positive for the real to be able to reverse the downward trend in which it has been going over the last few weeks”, says Rugik.

He adds that, with the dollar approaching the level of R$5.50 against the real, it would not be surprising if the BC (Central Bank) intervenes in the market with the purchase of dollars, in order to remove some of the upward pressure from the exchange rate, with the aim of avoiding contagion to inflation.

Economists estimate that the main consequence that a weaker real can bring to the Brazilian economy is an increase in inflation, which has been running at very high levels in the country for some time.

With the dollar more expensive, the products that the country imports from the United States automatically also rise in price, which is reflected in a general increase in goods traded in the Brazilian market. “The high dollar ends up causing the United States to export inflation to other countries”, says Luca Mercadante, an economist at Rio Bravo.

Data from the IBGE (Brazilian Institute of Geography and Statistics) show that inflation measured by the IPCA (Broad Consumer Price Index) rose 0.67% in June, with 12-month inflation reaching the 11-month mark. 89%.

This Thursday, the dollar fluctuated up 0.75% against the real, trading at R$ 5.5030 for sale, the highest level since January this year.