The weak dollar is making Europe’s bad economy worse: Marcus Ashworth

Key topics:Dollar slides over 3%, raising risks for global currenciesStrong euro pressures ECB as growth weakens across EuropeWeaker dollar boosts emerging markets, Asia manages currencies carefully.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Marcus Ashworth.The dollar has fallen more than 3% in 10 days, pouring fuel on geopolitical fire. If the US engineers an even weaker greenback, whether by intent or mishap, the fallout for other currencies may be messy.“This may very well be the beginning of the next leg lower in the dollar, and many may not be prepared for it,” according to Stephen Jen, a respected currency economist. US Treasury Secretary Scott Bessent has taken to the airwaves to insist that a “strong dollar” is still his North Star, but his boss seems happy enough with its fall to Earth.Whether everyone else is quite so content is another matter. Europe is more vulnerable than most, as the euro is already relatively strong. It gives the Feb. 5 European Central Bank meeting a bit more spice than the usual snoozefest. Any more loose talk about rate hikes would be unwise..The ECB doesn’t officially have a currency target, but it does really. The euro briefly traded above $1.20 on Wednesday, the highest since 2021. That level has usually caused anguish for the bloc’s export-led economy. Switzerland is in the same boat, with the franc at its strongest against the greenback for a decade..Read more:.The Economist: Currency risk - the hidden threat squeezing shareholder returns.In a surprisingly frank admission in July, ECB Vice-President Luis de Guindos said it would be “complicated” if the euro exceeded $1.20. This week, Austrian central banker Martin Kocher told the Financial Times that the ECB may be forced to act if any further strengthening looked likely to lower inflation forecasts. He pointedly added that the Chinese yuan was “structurally undervalued” against the euro.No actual intervention is likely yet but ECB council member Francois Villeroy de Galhau wrote on LinkedIn that he and others will be weighing the currency’s value when discussing monetary policy. ECB President Christine Lagarde should prep for questions at her press conference next Thursday..Germany and the Netherlands vie globally with China and Japan for the largest current-account surpluses, particularly on goods exports. But a less competitive currency is just about the last thing either country needs presently. Germany still looks a bit too close to recessionary conditions, judging by purchasing managers surveys in January. France is in a precarious economic state, made worse by persistent sub-1% inflation..The fiscal cavalry is sadly still quite far away. A massive increase in euro-area defence and infrastructure spending is going to take a while to manifest. And the tariff backdrop isn’t great for manufacturers. The European Union’s Mercosur trade deal with South American countries has been kicked into the legislative long grass by the European Parliament. Even the promising agreement that the bloc has tentatively agreed with India amounts only to a reduction in tariffs of €4 billion ($5 billion) annually.It’s frustrating for ECB policymakers and EU politicians that they’ve got inflation under control, but they cannot get growth going. Adding to the sense of cosmic injustice, the US dollar is weakening despite its much stronger economy.You can be sure Donald Trump will claim it’s the result of his own genius. But this strange state of affairs is being driven by a perception of where interest rates are headed next. The US economy and stock market, and its AI industry, may be running hot, but a new Federal Reserve Chair will almost certainly be a Trump-friendly rates slasher. By contrast, the ECB admirably halved its deposit rate to 2% in successive meetings to help its beleaguered economies, and is absurdly making noises that monetary policy may now be too loose.The rest of the world will probably cope better with a weaker dollar. Most emerging markets will benefit as investors look for higher-yielding assets away from the US. Asian countries, meanwhile, are in a totally different place to Europe. China, South Korea and Japan compete to keep their respective currencies as weak as possible relative to each other, and to the dollar..Read more:.Fed cuts rates as Powell warns US labour market weakness emerging.Recently, this game has been curtailed as the US Treasury is easily riled if it suspects currency manipulation. Last week the People’s Bank of China strengthened its daily reference rate, pushing the yuan rate below 7 to the dollar for the first time since 2023. But the Chinese currency is still pretty much where Beijing wants it — weak versus the dollar and its Asian rivals..Japan took action last Friday that caused the yen to rise in value by about 3%. The Bank of Japan has indulged in repeat performative hand-wringing about the yen’s weakness, though this recent incident appears to have been instigated at the US Treasury’s behest. Bessent said Wednesday that the US is “absolutely not” intervening to sell the dollar against the yen..In most circumstances it’s easier supporting a currency that has become relatively too cheap than trying to hold down an appreciating one that’s being driven higher by forces outside of domestic control. Just look at the Swiss National Bank’s inability to hold back an appreciating franc. In a worst-case scenario, the ECB may start facing some serious protests from euro-zone politicians if the currency keeps heading the same way.A good way to avoid this would be by subtly rowing back on the dangerous perception that hawkish policymakers are hankering for interest rates to be higher. Reasserting an implicit bias toward easing might be essential if the the speed of the euro’s ascent accelerates. Acting early with dovish rhetoric would be the smart move..© 2026 Bloomberg L.P.

The weak dollar is making Europe’s bad economy worse: Marcus Ashworth

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