The tumbling euro – what does this mean for trade finance?
Euro weakens to a 12-year low against dollar
The euro has been on the slide since the European Central Bank outlined its quantitative easing (QE) plans. QE has previously been used to create new money by many central banks including the US Federal Reserve, the Bank of England and the Bank of Japan, but this has had the effect of driving down the price of currencies.
Currency traders are predicting that the single currency will fall below parity against the dollar due to the potential increase of US interest rates, concerns about Greece and the widely reported slow down of the Chinese economy. The slowdown has led to a reduction in metal and crude oil prices.
The euro has fallen by over 10% versus the dollar to the lowest level in over 11 years and is currently trading around $1.08. The pound is at €1.40 against the euro which it has not been for 8 years. The strengthening of the dollar has meant that there is a knock on effect in countries such as the Mexican peso and Turkish Lira trading near to its lowest ever level.
The governor of the Bank of England, Mark Carney, ruled out the possibility of further cuts in interest rates or an expansion of the Bank’s £375bn QE programme.
What are the implications of the falling Euro against the Dollar/ Pound for Trade Finance?
As a result of the falling Euro against the dollar other currencies, exports from the eurozone are cheaper and also travellers will receive more euros in return for their pounds. The euro currency movement will also cut the cost of imports and will actually increase the deflationary pressure.
To find out about the mitigation and management of risk against currencies during trade finance deals, see our article here.