Central Banks

Fed pushes euro to August low against dollar

Neelabh Chaturvedi
Janet Yellen speaks with Mario Draghi at the Jackson Hole economic symposium in Wyoming.
Bradly Boner | Bloomberg | Getty Images

The U.S. Federal Reserve just lent the European Central Bank (ECB) a helping hand.

The euro slumped to a two-month low against the U.S. dollar late Wednesday ET after the U.S. Fed revived the possibility of an increase in interest rates at the December meeting. A weaker currency would be a potential succor for a euro zone tackling a slump in demand for its products as well as feeble inflation.

The euro was trading at 1.0918 against the dollar, having dropped to 1.0894 shortly after the Fed announcement.

The currency move underscores the growing divergence between monetary policy on either side of the Atlantic. While the Fed is edging closer to lifting interest rates for the first time since 2006, the ECB is mulling providing more stimulus.

"The EUR trade becomes easier with the Fed and ECB on opposing tracks," said strategists at ANZ in a note.

At its meeting last week, ECB President Mario Draghi said the euro zone's trillion-euro bond-buying program will need to be "re-examined in December" as inflation remains stubbornly low amid emerging market weakness.

At a press conference after the ECB meeting, Draghi gave a nod to the impact a stronger euro was having, while making clear that the exchange rate is not a policy target for the ECB.

"Of course, one of the downsides I mentioned before, one of the downside risks to our inflation projections comes from the exchange rate. As I've said before, the nominal effective exchange rate has been appreciating over the last few months – four, five months – to a somewhat significant level," Draghi said last week.

The impact of the currency on exports is admittedly less clear, as a decline in exports is also a function of weaker economic impulses in countries that buy goods from the euro zone. But at the margin, a weaker euro should make exports from the region more competitive.

Euro-dollar going to 1.20, not parity: Strategist

To be sure, not everyone is convinced that the euro is headed lower.

Currency experts expecting the euro to reach parity with the U.S. dollar have been labeled "tiresome" by David Bloom, the global head of foreign exchange strategy at HSBC, who sees the two currencies moving in opposite directions.

He expects the euro to rise to 1.20 against the dollar.