The euro, the common currency of 19 European countries, fell by 1.5% against the US dollar, reaching its lowest level in nearly 20 years, according to report. The reasons for this new fall are not clear.
The constant analysis suggests that economic agents fear that the euro zone is in recession. It is nevertheless constant that inflation in the euro area reached 8.6% at the end of June, mainly driven by energy prices, paid for globally mainly in US dollars. This generalised rise in world market prices is benefiting the US currency; it is in great demand and its value is rising.
The current situation has prompted the European Central Bank (ECB) to consider raising its key rates at its meeting on 21 July 2022. This is the first time in 11 years. However, investors do not seem to be satisfied with the 0.25% increase announced by ECB President Christine Lagarde. Many investors therefore prefer the dollar, which is more profitable.
While the UEMOA and CEMAC countries have no influence on European monetary policy decisions, variations in the euro have an impact on them because of the fixed parity between their currency, the FCFA, and the European currency.
On Wednesday 6 July 2022, the African currency was down 10% since the beginning of the year and was trading at 640.1 FCFA to the dollar, according to information from the Xe.com platform. This is its weakest level in over 20 years.
No forecasts from central banks and the ministries of finance and economy in the two sub-regions predicted such a scenario. Gains and losses will have to be carefully analysed, as all countries are already preparing for the 2023 budgets. For countries that export raw materials such as oil, gold, gas, cocoa and cotton, there is a real opportunity to increase import revenues.
And for the countries of the UEMOA zone, whose central banks have recovered their foreign exchange reserves and invested them mainly in US dollar assets, it is also an opportunity to generate capital gains. But both sub-regions are also importers of goods and services and the inflation-ridden eurozone is a key partner.
The difficulty is to know how long this situation will last. The crisis in Ukraine and disruptions in the global supply chain are cited as the main reasons. It should be noted, however, that the fall of the euro started on 1 January 2021. Once again, it was market sentiment that made the difference. The US and European central banks implemented accommodative monetary policies in the face of the 2008 and Covid-19 crises.
But while the US central bank started to give signals of a suspension of its programme, the Europeans tried to find adaptation measures, to support the debt of some countries like France or Italy, and above all, to allow a vigorous and constant post-Covid recovery. This choice turns out not to have had only positive implications. And the economic agents of CEMAC and UEMOA must suffer the effects of these choices, without their opinions being able to count in the search for solutions to the current challenge.