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The euro sank to a two-decade low of $0.9810 on Thursday.
It came after Russian President Vladimir Putin ordered the partial mobilization of reservists in an escalation of the war in Ukraine and after the Federal Reserve enforced another stark interest rate hike as a response to soaring inflation, reports Deutsche Welle.
The Federal Reserve also forecast that more hikes were coming, which left many market experts surprised.
It was the first time since October 2002 that the euro to dollar ratio hit 0.9814.
The European Central Bank (ECB) had joined the push to fight inflation just recently, but has struggled to fully curb it.
The ECB, like many other central banks for developed western economies, has consistently held interest rates at or near zero almost without interruption since the financial crash of 2008. The target was to promote economic growth and moderate inflation of around 2%.
For years, these historically low rates barely kept growth positive and did not boost inflation. But global supply disruptions amid the COVID pandemic followed by the war in Ukraine’s impact on core product prices such as food and fuel have now combined to push inflation up towards 10%, prompting banks to raise rates to try to rein it back in.
International currencies experience historic lows
The British sterling hit $1.1233, its lowest in 37 years. The Thai baht, Malaysian ringgit, Singapore dollar and Swedish crown all made major new lows.
And South Korea’s won dropped down past its symbolic 1,400 per dollar mark for the first time since 2009 while the Chinese yen was down about 20% on the dollar this year and at 144.29 per dollar is near a 24-year low.
Both the Australian and New Zealand dollars were pinned to their lowest since the mid-2020s.
To battle the fallout, central bank meetings in Taiwan, Japan, the Philippines, Britain, Norway and Indonesia were scheduled, with big hikes expected in most countries.
Europe says goodbye to negative rates
Europe’s decade-long experiment with negative interest rates, which ended on Thursday with the Swiss National Bank’s return to positive territory, showed one thing: they can exist beyond the realms of economic science fiction.
Launched to revive economies after the 2007/08 financial crisis, the policy flipped standard money wisdom on its head: banks had to pay a fee to park cash with their central banks; some home-owners found mortgages that paid them interest; and rewards for the act of saving all but vanished, according to a Reuters analysis.
With the exercise now abandoned in the face of galloping inflation brought on by pandemic and the Ukraine war, doubts linger over its effectiveness and under what circumstances it will ever be used again.
“I think that probably the bar is going to be higher in the future,” said Claudio Borio, head of the Monetary and Economic Department of the Basel-based Bank of International Settlements which acts as bank to the world’s central banks.
Rarely does monetary policy generate as much sound and fury as did the recourse in the early 2010s to negative rates by four European central banks and the Bank of Japan – now the only monetary authority still sticking with them.
With interest rates back then already close to zero, they had run out of conventional ammunition to ward off the threat of outright deflation they feared would choke off the economic recovery. The only way out, they decided, was to go below zero.
Bank chiefs fumed as the European Central Bank, Swedish Riksbank, Swiss National Bank (SNB) and Denmark’s Nationalbank went negative in moves they said undermined the whole banking business model of being able to make a profit out of lending.
Local media joined in the criticism, with Swiss newspapers in 2015 calling the moment “Frankenshock” and Germany’s Bild labelling the then ECB chief Mario Draghi “Count Draghila” for “sucking our accounts dry”.
For sure, those who relied on the return from cash savings clearly suffered during Europe’s period of ultra-low to negative rates – even if they could at least take solace from the fact that low inflation was protecting their initial savings.
Other side-effects are harder to pick apart.
Fears of negative rates leading to money-hoarding proved largely unfounded: in Switzerland, for example, the number of 1,000-franc notes in circulation remained the same, suggesting customers were not withdrawing cash to store in a safe at home.
As one Danish bank vaunted the world’s first negative rate mortgage, it is likely that cheap borrowing added steam to house price spikes across the region. But prices were often being squeezed higher by local factors including tight supply.
While many other elements have been at play, euro area bank stocks have fallen some 45% since 2014 – despite ECB moves to shield them with exemptions from charges on some deposits and access to ultra-cheap borrowing.
Yet a report to European Parliament by the Bruegel think tank last year concluded that overall bank sector profits had not been significantly harmed by negative rates, noting that the downside was being offset by gains in asset investments.
“In the end, they worked the same as normal rate cuts,” said report co-author Gregory Claeys, while acknowledging the impact may have been greater had the experiment gone on for longer.
(DT)
