Will Mega Hike Save Eurozone From Looming Crisis?

The Swiss National Bank imposed a minimum exchange rate against the Euro. Fears are, currently, accelerating of a new Euro crisis is broadly spreading. There are several signals that the Euro is weakening again.

This week, the shared currency fell to a new all-time low against the Swiss franc. The Euro price suddenly dropped below 96 cents and suddenly questions arise such as: How weak will the euro be? Why is it losing value?

German media are curiously asking: “Is there a danger of a new euro crisis?” The Euro is in a seemingly deep descent. After revisiting parity over the few previous trading weeks, observers and investors have fears that the Euro could soon be worth only 93 cents, or even 88 cents. Euro exchange rate can be somewhere between high 80 and low 90.

Why is the Swiss Franc Stronger Against the Euro?

Rates below 90 cents will result in huge loss in value. In June 1, the Euro was still worth 104 cents. Then the SNB surprisingly raised its prime interest rate while the ECB was still waiting. It was more worthwhile to invest in Swiss Francs, but less in Euros. Since then, the Euro has weakened against the franc. The Euro could even lose up to 15 per cent of its value.

Why is the US Dollar Stronger Against the Euro?

The Euro has become cheaper against the US dollar in 20 years: most recently it was 99 cents. And according to the forecasts of American banks, this is just the beginning. It may soon be 95 cents. At the beginning of the summer, there were headlines in the United States like: “Where to Travel in Europe While the Dollar Is Strong.”


There are also expectations for the US and the Euro, which are currently falling apart. In the US, the economy is doing well, the labour market is booming but inflation is higher than the US Fed’s target. So, it will continue to raise interest rates to spur consumption and moderate inflation. On the other hand, the situation in the Eurozone is more terrible.

On the one hand, inflation is very high, so the ECB will have to significantly increase its key interest rates. On the other hand, if rising energy prices affect consumption, there is a risk of a recession.

Germany and France are already in recession, so the ECB should not overburden the economy. Given this dilemma, the ECB will raise its key interest rates lower than the US Fed, at least the financial market believes. And this expectation weakens the Euro.