At its meeting today, the European Central Bank (ECB) cut its key interest rates by 25 basis points to 3.5% in response to persistently weak inflation and the economic challenges in the eurozone. This decision comes at a time when the US Federal Reserve has also signaled its willingness to cut interest rates at its next meeting on September 18. “The ECB's decision and the Fed's likely interest rate cut will lead to movements on the global currency markets. The US dollar could continue to lose value against the euro,” explains Mathias Beil, Head of Private Banking at Hamburg-based Sutor Bank. Investors should therefore be alert to currency risks and opportunities. Export-oriented companies, especially in the USA, could benefit from a weaker US dollar, while bond investors could profit from a normalization of the yield curve in the USA and Europe.
Possible Fed rate cut would weaken the US dollar
The ECB's rate cut was widely expected, as the economic situation in the eurozone remains fragile and at the same time inflation in the eurozone was significantly lower at 2.2 percent than in July (2.6 percent). The euro recently traded at 1.1050 against the US dollar, although a further devaluation of the dollar is likely if the US Federal Reserve also cuts interest rates by up to 50 basis points.“This potential interest rate disadvantage for the US dollar could strengthen the euro in the coming weeks and put pressure on the US dollar,” says asset expert Beil.In general, a weaker US dollar means that investments in euros or euro-denominated assets could become more attractive for investors.
The weakening of the US dollar could be a positive development for the US economy.Export-oriented companies in particular are likely to benefit from an improvement in international competitiveness if the US dollar loses value against major currencies such as the euro and pound sterling following the expected Fed interest rate cut.The long-awaited normalization of the interest rate structure could occur on the US bond market. Yields on short-term bonds are currently higher than those on long-term bonds, which is considered atypical and indicates a so-called inverse interest rate structure.A stronger rate cut by the Fed could eliminate this anomaly and lead to a flatter or positive yield curve.As the yield curve normalizes in the US, investors could benefit from higher yields on two- and three-year bonds, while short-term one-year bonds could offer lower yields after a Fed rate cut.
The British pound has also benefited from recent market developments.While the Bank of England decided to cut interest rates by 25 basis points at its last meeting, it has announced that it will remain cautious about further easing.“This stance could lead to the UK offering one of the most attractive real interest rates in the future, which should continue to support the pound - both against the US dollar and the euro,” explains Mathias Beil.
According to Mathias Beil, investors should keep an eye on currencies. The ECB's current interest rate cut and the upcoming decisions by the US Federal Reserve could have a significant impact on the currency and bond markets. A weaker US dollar could boost global trade flows, while the interest rate cuts in Europe and the US could create new momentum on the bond markets.
