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09.04.2020 09:16 AM
Covid-19 surprises: Euro for $1, dollar - in "defense"

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The global octopus called the COVID-19 that has engulfed the planet has brought down the economies of a number of countries, putting life and health at risk, and forced many economic forecasts to be revised. First of all, they concern the key currencies – EUR and USD, the near-term prospects of which are very disturbing to the market.

The US currency is still the leader in this situation. The greenback, which has assumed the role of a protective asset since the beginning of the COVID-19 pandemic, continues to maintain its status. It was not hindered even by the unprecedented support measures from the US Federal Reserve in the form of injecting $2.2 trillion into the economy. Despite the harsh economic forecasts for the US economy for the current year and 2021, when its growth rate will be 5% lower than pre-crisis indicators, the dollar continues to successfully defend its position.

In contrast to the greenback, the European currency is teetering on the edge of a cliff, risking not only a short-term collapse, but also settling in the bottom. Unsuccessful negotiations of the Eurogroup, held at the beginning of the week, added to the euro's negative. Leaders of the eurozone countries were expected to develop a common tactic to counter the negative impact of the coronavirus on the economy. However, the parties could not come to an agreement.

The consensus was hindered by contradictions between Italy and the Netherlands on the issue of attracting loans. The countries could not agree on the terms and conditions for issuing these loans. At the same time, Italy and Spain are ready to support the issue of crown bonds – common eurobonds, investments which will help lift the eurozone economy, knocked down by COVID-19. However, Germany, Austria, the Netherlands, Finland and Estonia are opposed to the issue of crown bonds. The circle is closed, the European economy is still in collapse, and the single currency is in a semi-fainting state.

According to experts, if the leaders of the EU countries do not form a single plan to support the economy, the euro will receive a blow from which it will find it difficult to recover. In this case, the EUR/USD pair will quickly collapse to this year's lows, that is, to the critical level of 1.0650. At the moment, the pair is on the defensive. The EUR/USD pair was trading in the range of 1.0842–1.0843 on Thursday morning, April 9. Eventually, the pair went to 1.0851, in an attempt to climb higher.

The most negative scenario for the single currency was suggested by Australia & New Zealand Banking Group Ltd (ANZ). The financial institution believes that the euro will fall to $1 by September 2020, and to $0.99 by the end of the year. As a result, the euro will sink by 8%, ending the year with parity with the dollar, ANZ said. This development, which entails a total devaluation of the euro, is possible if European leaders do not act or if it is impossible to agree on a joint revival of the eurozone economy.

At the moment, the European currency is losing to the greenback on all fronts. Analysts find it difficult to forecast for the near future and are cautious about the long-term prospects for both the euro and the dollar. Currency strategists at the Goldman Sachs Bank expect a 9% drop in eurozone GDP in 2020 due to the COVID-19 pandemic. This scenario is relatively positive. A more pessimistic version assumes large-scale economic damage and a 16% reduction in GDP. According to experts, this is much higher than the expected loss of US GDP.

Against this background, any US asset, primarily the dollar, has an undeniable advantage over European ones. Thanks to the stability of the US economy, the greenback is still in demand among investors, and the euro has to fight, defend its positions, proving its need for the eurozone.

Larisa Kolesnikova,
Analytical expert of InstaForex
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