The euro climbs above 1.16 dollars to a two month high as the market gives up on a rate hike

The euro moved above the 1.16 dollar mark on Monday and reached its highest level in two months. Behind the move are fading expectations that the American central bank will raise interest rates.

The move is part of a broader weakening of the American currency. The dollar touched a three month low during the week.

The short version

• The euro moved above the 1.16 dollar mark on Monday and reached its highest level in two months.
• The S&P 500 passed 7,800 points for the first time and closed at 7,798.99 after a gain of 0.65 percent.
• Brent lost more than two percent to 87.07 dollars a barrel, and West Texas Intermediate also fell more than two percent to 81.25 dollars.

Rate expectations set the exchange rate

Exchange rates between major currencies follow expected interest rate gaps in the short run. If the market expects rising rates in the United States, the dollar becomes more attractive, because investors can earn more there. Once that expectation disappears, the move reverses.

That is exactly what happened. Inflation data from the United States came in line with estimates. The consumer price index for July matched expectations, which turned attention to the producer price figures. Economists had expected a rise of 0.2 percent against the previous month.

Stock markets at record levels

Equity markets are running strongly alongside the weaker dollar. The S&P 500 passed the 7,800 point mark for the first time and closed at 7,798.99 after a gain of 0.65 percent. The Nasdaq Composite added 0.81 percent to 26,803.03 points, supported by Meta Platforms, Micron Technology and Netflix. The Dow Jones Industrial Average rose 0.13 percent to 53,839.99 points.

On Monday technology shares carried global equity markets further, after strong revenue growth at Anthropic supported the view that heavy spending on artificial intelligence will continue.

Frankfurt and the rest of Europe started the week with small gains. Market participants are still working through the last wave of quarterly figures and watching the geopolitical situation.

Oil falls despite the conflict

The oil market stands out. Brent fell by more than two percent to 87.07 dollars a barrel, and the American grade West Texas Intermediate also lost more than two percent to 81.25 dollars. Traders gave more weight to softer demand than to the running conflict between the United States and Iran.

The situation around the Strait of Hormuz has sharpened again. Iran rejected an account of the waterway given by the American president, while a report about an attack on a ship made the rounds.

For Europe this combination matters twice over. A weaker dollar makes commodity imports cheaper, because they are settled in that currency. At the same time a stronger euro makes exports from European manufacturers more expensive in the dollar area.

What a strong euro means for investors

For investors in the euro area the move cuts both ways. Anyone holding American shares gives up part of the price gain through the exchange rate when the euro rises. If a share gains five percent in dollars and the dollar loses three percent, only around two percent remain in euro terms.

Consumers benefit the other way round, because imports from the dollar area become cheaper. That covers energy, many raw materials and part of the technology products.

For the coming week market participants expect direction mainly from economic data out of Japan and China and from an American industrial indicator. Tuesday also brings the ZEW economic expectations for Germany. After a recent encouraging survey from another institute, DekaBank expects a better reading for both current conditions and expectations.

Frequently asked questions

Why has the euro risen above 1.16 dollars

The market no longer expects the American central bank to raise interest rates. Once that expectation falls away, the dollar loses its pull, because higher returns there are no longer in prospect. The euro reached its highest level in two months at above 1.16 dollars as a result.

What does a strong euro mean for American shares in a portfolio

An investor in the euro area gives up part of the price gain through the exchange rate when the euro rises. If an American share gains five percent and the dollar loses three percent at the same time, only around two percent remain in euro terms. A falling euro works the other way and acts like an extra gain.

Why is oil falling despite the conflict in the Gulf

Traders currently give more weight to softer demand than to the political risk around the Strait of Hormuz. Brent fell by more than two percent to 87.07 dollars a barrel even though the conflict between the United States and Iran continues. A weaker dollar makes oil cheaper for European buyers on top of that.

Which dates shape the coming week

Market participants expect direction mainly from economic data out of Japan and China and from an American industrial indicator. The ZEW economic expectations for Germany follow on Tuesday. DekaBank expects a better reading there for both current conditions and expectations.

This analysis is for information only and is not investment advice.