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ECONOMY

Euro hits record high against the dollar

The euro has surged to a record high against the US dollar, as Europe’s single currency broke through the important psychological barrier of $1.50 late on Tuesday.

Euro hits record high against the dollar
Photo: dpa

The magic barrier has been broken. Only a few weeks after the massive cuts to US interest rates, the euro has surged to new highs in the currency markets. Europe’s single currency hit a record high of $1.5047 late on Tuesday evening. But breaking through the important psychological boundary of $1.50 could be an important turning point according to economists, who believe the euro isn’t likely to soar much higher against the greenback.

Worries about the euro-zone’s economy and possible interest rate cuts by the European Central Bank are likely to weaken the euro in the coming months. Plus the euro has not appreciated against other major currencies like the Japanese yen and Swiss franc in recent months.

“The euro isn’t really such an unbelievably hard currency,“ said economist Christan Melzer from DekaBank in Frankfurt. Last year the euro appreciated against the dollar around ten percent – but measured against a basket of important world currencies the euro appreciated only seven percent over the same period. Since the start of 2008 the euro has remained largely stable against the grouped currencies, appreciating only 0.1 percent due to heavy losses on global stock markets, which made it less attractive to invest in both euros and dollars.

“The cycle is over, the dollar will recover in the second half of the year,” said Claudia Windt, an economist with the Landesbank Hesse-Thuringia. She explained that the difference in interest rates between the United States and the euro zone is likely to decrease in the last two quarters of 2008.

The US dollar has plummeted in recent months as the subprime lending crisis rocked the world’s largest economy. The US Federal Reserve cut interest rates twice in January, causing the euro to appreciate against the greenback as it became more attractive to invest in Europe than America. But the strong euro hurts big exporters like Germany, as the country’s goods become more expensive abroad.

ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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