Growth and Fragmentation Risks Weigh on the Euro-US Dollar Exchange Rate

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  Concerns about the economy and Fed policy are weighing on the EUR/USD exchange rate.

  European bond market losses are seen as a potential danger sign.

  Risk that ECB policy will put Southern Europe in jeopardy

  However, the emergence of new or innovative ECB policy instruments may allay some of these worries.

  This year's Euro-to-Dollar exchange rate has remained close to five-year lows, despite market expectations for an abrupt rise in European Central Bank (ECB) interest rates; the bank says this is likely due to concerns about the Eurozone economy and risks of financial fragmentation.


  As of last week, the euro's value against the dollar had fallen as low as 1.0344, its weakest level since the height of the coronavirus crisis in 2015.

  The Euro/Dollar exchange rate quickly rose above 1.05 before the weekend, but it has remained suppressed below 1.06 thus far in the new week, despite the growing number of Governing Council members who suggest the ECB may be close to raising its interest rates.

  According to Dominic Bunning, HSBC's head of European FX research, “The FX market seems to think the ECB may not be able to deliver the precise degree of tightening that can tame inflation without causing too much of an impact on growth.”

  For the ECB, however, there is a growing concern about yield spreads widening between the region's core and its periphery, according to a research briefing released on Tuesday by Bunning and colleagues.

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