Euro decline continues: currency falls below 1.12 US dollars

The euro continues its downward slide into the new week. At times the common currency fell to $1.1161. This meant that one euro cost less than $1.12 for the first time since May 2025.

The common currency has lost more than five cents since mid-August. In January, the euro exchange rate was temporarily above $1.20.

There are a number of reasons for the euro's weakness. Analysts attribute the decline in recent weeks primarily to the sharp rise in yields on US bonds. These have recently directed capital flows more strongly to the United States again. Investors from Europe are also increasingly investing their capital in the USA and exchanging their euros for dollars.

Although yields are also rising in Europe, overall they rose even more strongly in the USA. The spread, i.e. the yield difference between ten-year US Treasuries and German federal bonds, has now widened to 1.8 percentage points.

In both currency areas, key interest rate expectations are currently more in favor of the dollar. The key interest rate is currently 3.75 to 4.00 percent in the USA, which is also significantly higher than in the euro area at 2.5 percent. Both the US Federal Reserve (Fed) and the European Central Bank (ECB) are expected to make further interest rate hikes to combat high inflation.

Despite the pressure from the White House, observers believe the Fed will be no less determined than the Europeans. Today, for example, ECB chief economist Philip Lane signaled a "measured" reaction from the European central bank to the latest surge in inflation. The markets are currently expecting a small interest rate hike from both central banks this year.

But high oil prices are also weakening the euro against the dollar. On the one hand, because oil is predominantly paid for in dollars and as prices for the raw material rise, the demand for dollars increases in order to be able to buy oil on the world market.

On the other hand, the United States is one of the largest oil producers in the world. The oil industry's higher revenues strengthen the US economy and thus confidence in the dollar.

In addition to these longer-term factors, there are also short-term pressures on the euro. Foreign exchange analysts attribute today's price loss primarily to concerns about public finances in France.

The government in Paris wants to use tough austerity measures to reduce the budget deficit from 5.4 percent of economic output to five percent by the 2027 election year. However, the outlook is uncertain as Prime Minister Sebastien Lecornu's government cannot rely on its own majority in parliament.

The political uncertainty in Spain, where Prime Minister Pedro Sánchez has called for early elections, as well as the results of the German state elections in Saxony-Anhalt and Berlin are also being cited as weighing on the euro today.

In this environment, the euro's weakness could continue. After falling below the $1.12 mark, Helaba experts believe there is room for a fall to $1.10.

While the weakness of the euro is making travel to the USA significantly more expensive, European companies can look forward to better export prospects because they can generate more sales in their own currency for their products abroad.

At the same time, however, trust in our own economic area is suffering, which also makes the European financial markets less attractive.

The political upheavals in Europe are now also being blamed for the subdued start to the week on the stock market. The DAX barely moved until midday, but is currently gaining around 0.3 percent to 25,318 points.