2023 is being a decisive year for the global economy. We have witnessed economic growth slow down sharply due to, initially the pandemic and then to higher than foreseen inflation, rising interest rates, reduced investment and general uncertainty. Indeed, according to a recent World Bank report, the "speed limit" of the global economy - the maximum long-term rate at which it can grow without causing inflation - will fall to its lowest level in 30 years by 2030, pointing to a new cycle of economic slowdown.1
The past few months have also seen volatility in the wider investment landscape and for the banking sector in particular, following UBS’ acquisition of Credit Suisse, the SVB, Signature Bank and First Republic Bank collapse. The situation on both sides of the ocean is experiencing convulsive moments due to the unexpected banking instability in the US and its contagion in Europe to a high systemic risk bank such as Credit Suisse, with high emergency operations and increased resources on the part of the US and European monetary authorities.
Against this backdrop, economic volatility has had a major impact on exchange rates. The euro saw some of the highest losses during the uncertainty of 2022. It fell below parity compared to the dollar for the first time in history2, reaching to its lowest point in September. On a 12-month basis, this represented a 18.1% drop. Decisions related to monetary policy in Europe and in the US and the risk of disruption in gas supply for Europe negatively impacting growth, were key drivers behind this drop. As a result, the European Central Bank announced interest rate hikes3 in an attempt to mitigate inflation, a prospective monetary policy shift following that taken by the US Federal Reserve.
The shadow of an economic recession has increased concerns about currencies volatility, being one of the main concerns for Spanish and European companies, especially those operating in international markets. The events of the banking sector earlier in the year have dampened risk appetite, which in itself benefits the dollar because of its safe haven status.
However, the risks to financial stability caused by recent events are most likely to be temporary. Coupled with the slower pace of Fed rate hikes, there is still room for a depreciation of the dollar and a strengthening of the euro later this year. In addition, the threat caused by high energy prices in the Eurozone has also eased due to a mild winter in much of northern Europe, potentially supporting a stronger euro.