(Business in Cameroon) - Euro, the currency used in 19 European countries, last July 5 slid by 1.5% against the U.S. dollar to its lowest rate in 20 years. Many reasons can explain this trend although market analysis over a short period can easily be biased.
The Eurozone could be in recession since inflation there reached a solid 8.6% at the end of June, mainly driven by energy prices. This price hike on the global market has most benefited the American currency, which is in great demand and is increasing in value. The U.S. dollar is the most widely used currency in international trade.
The current situation has prompted the European Central Bank (ECB) to consider raising its key rates, according to a Board meeting held on July 21, 2022. 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 of them prefer the dollar, which they deem more profitable.
Effects on pegged CFA
While Waemu and Cemac countries do not influence European monetary policy decisions, they are directly affected by the variations between the Euro and the U.S. dollar. As of July 6, 2022, the CFA was down 10% since January 2022 and was trading at CFA640.1 per dollar, according to the currency data platform Xe.com. This is its weakest level in more than 20 years.
Neither the central banks nor the finance ministries in the two sub-regions saw that coming. Gains and losses should now be carefully analyzed as countries prepare for their 2023 budgets. Countries that export raw materials such as oil, gold, gas, cocoa, and cotton, have an opportunity to increase import revenues. For WAEMU countries, whose central banks have recovered their forex reserves and invested them mainly in greenback assets, it is also an opportunity to generate capital gains. However, both sub-regions are also importers of goods and services, and the inflation-ridden eurozone is one of their key partners.
It is hard to predict how long the situation will last. Some analysts blame it on the crisis in Ukraine and disruptions in the global supply chain. It should be noted that the fall of the euro started on January 1, 2021, but the market sentiment has cushioned it. The U.S. and European central banks implemented accommodative monetary policies during the 2008 economic crisis and the Covid-19 crisis.
However, as the US central bank began to give signals of a suspension of its program, the Europeans tried to find adaptive measures, not only to support the debt of some countries like France or Italy but also to ensure a vigorous and constant post-covid recovery. This choice also brought some negative implications; and economic operators within the CEMAC and WAEMU areas will suffer them, without their opinions being taken into account in the search for solutions.