Recently, under the combined effect of increasing uncertainty about the energy crisis, expectations of a slowdown in the euro zone economy, and the hawkish stance of the Federal Reserve, the euro has plummeted against the dollar. On the 14th local time, the exchange rate of the euro against the US dollar in the European foreign exchange market once fell to 1 euro to US$0.9953, the lowest level in the past 20 years.

ING strategists said that from the forecast range of the options market, the euro may fall to as low as 0.9545 against the dollar in the next four weeks. The last time the euro reached this low against the dollar was in 2002. The European Central Bank is expected to announce its first interest rate hike in 11 years on the 21st local time.

The euro plummeted all the way, for a number of reasons.

First, the conflict between Russia and Ukraine has pushed up European prices in an all-round way, and the risk of stagflation in the euro zone has risen. Since the outbreak of the Russian-Ukrainian conflict, many EU countries have followed suit with the United States. On the one hand, the conflict has not been effectively alleviated due to the continuous firefighting, which has undermined the EU countries’ expectations of regional strategic stability and a prosperous future; on the other hand, the EU has followed up on Russia for more The dimensional sanctions directly lead to the EU itself facing the dilemma of the shortage of energy, natural gas and agricultural products.

Second, the Fed is using monetary policy to pass the crisis on to the EU. The United States has curbed its serious inflation situation by raising interest rates and other means, so that the US dollar can continue to play the role of high-yield safe haven, which puts pressure on the exchange rate of the euro and the yen. In this situation, the euro, which is also facing the problem of high inflation, has fallen into a relatively passive situation. Without raising interest rates, as the current situation shows, the EU is facing a series of pressures such as capital flight, currency devaluation, bond defaults, etc. If interest rates are raised, the already fragile economic recovery momentum of the EU will be further curbed. Debt risks will further increase, and more hidden dangers will emerge.

Third, the risks are superimposed, and Europe's long-term weak economy is unbearable. From the perspective of macroeconomic fundamentals, affected by the spillover from the conflict between Russia and Ukraine, rising energy prices have increased the energy cost of European industries, and at the same time have seriously affected household consumption and inhibited investment, thereby reducing the EU's economic growth rate. Economic recession and sovereign debt risks have caused the European Central Bank to not start raising interest rates so far, which has put the euro under constant short-selling pressure. In turn, the sharp fall in the euro exchange rate will continue to lift energy prices, and issues such as imported inflationary pressures will exacerbate the risk of recession in the region. However, the expected tightening of the European Central Bank will exacerbate the internal economic and financial fragmentation, and the expected debt default of some countries in the euro zone in the future will affect the market's confidence in the euro.

How does the sharp fall in the euro affect China?

The depreciation of the euro is also reflected in the exchange rate against the renminbi to a certain extent. At intraday on the 14th, 1 euro was 6.76 yuan against the RMB, which was also significantly lower than the 7.2 yuan at the beginning of the year. However, the RMB exchange rate against the US dollar remained resilient and the market was stable.

Exchange rate movements also usually have a direct impact on trade. In the first quarter of this year, the total value of imports and exports between China and the EU reached 1.31 trillion yuan, an increase of 10.2%. The depreciation of the euro is conducive to the export of goods to China, especially an export-oriented economy such as Germany, which will bring some changes to the Sino-European trade, but will not affect the Sino-European trade structure due to exchange rate changes. In addition, the role of China-EU currency swap should be further brought into play, and the scale of RMB and EUR-denominated settlements should be expanded to protect China-EU bilateral trade and investment from artificial exchange rate risks caused by the use of third-party currencies (such as the U.S. dollar).