Many imponderables on the foreign exchange market
The euro was initially in good shape in the first half of the year. The European single currency continued its recovery against the US dollar for a long time and at the beginning of May had already covered a good part of the way to our year-end target of now 1.12 at just under 1.11 US dollars per euro. However, the way up is not without obstacles. In May, for example, the euro fell back to its value from the beginning of the year. In view of the fragile geopolitical and macroeconomic situation, this should not come as a surprise.
The foreign exchange markets have to deal with a number of factors and events that are not part of the usual daily business. Above all, the extraordinary inflation episode and the resulting monetary policy require permanent revaluations. Inflation rates are now falling in all major economic areas. However, the disinflation process still has quite some way to go before the monetary guardians can sit back. In this respect, market players and observers are still trying to assess whether the central banks will tighten monetary policy further (US Fed, Bank of England) or how far the tightening will go (ECB). The assessment is made more difficult by diffuse economic signals. While a recession is expected for the US (which tends to have a dampening effect on prices), the US labour market surprises again and again with its considerable strength (which tends to have a wage- and price-increasing effect). In the eurozone, on the other hand, the economic recovery is likely to be somewhat weaker than previously expected. German economic data in particular have been disappointing recently. The weaker economy suggests that monetary policy should not be tightened too much. Finally, the currency market had to deal with the imponderables of the US debt ceiling. The conflict has been resolved in the meantime, but a default could have led to severe distortions in the financial markets.
In this context, it is remarkable that the safe havens of the US dollar and the Swiss franc react differently to the respective risk situation. While the euro can visibly gain against the US dollar when the risk appetite on the markets increases, the euro hardly succeeds in making up ground against the franc. This is where the fact that the Swiss National Bank (SNB) has committed itself to a strong franc policy in order to fight inflation comes into play. The euro's upward potential against the franc therefore remains limited.