Euro dips as recession hits Germany

25 May 2023

The Euro declined on Thursday as it was confirmed that Germany had entered a recession, whilst the Dollar reached a two-month high, making the most of safe-haven demand as US default concerns heighten.

The most recent concern was made by the Fitch rating agency, which placed the US AAA debt ratings on negative watch, a precursor to a potential downgrade if lawmakers don't manage to reach the debt limit, Reuters reports. 

USD has benefitted from demand for safe havens as the 1st June deadline looms for debt ceiling negotiations, the so-called "X-date." 

"It has been risk-off this week, and that has benefitted the Dollar generally," according to Stefan Mellin, senior analyst at Danske Bank. 

In Europe, mounting indications of economic unease led the single currency to fall to multi-month lows against the Dollar. 

Germany's economy registered a slight contraction in Q1 and was therefore in recession following negative growth in Q4 last year. 

"We have seen some divergent cross-Atlantic macro data this week, and while Germany is not the Euro, the momentum in the economy is stunningly weak," Mellin added. 

In addition, the Dollar index – measuring the currency against six major rivals, increased 0.3% to 104.16, a high not seen since 17th March.

The Euro declined around 0.2%, a two-month low of $1.0715, whilst the Sterling edged down 0.1% after fleetingly hitting its weakest since 3rd April at $1.2332. 

Whereas against the Yen, the greenback reached its strongest since the end of November at 139.705, yet at the time of writing was down 0.1% at 139.345. 

In China, the Yuan once again returned to a six-month low, falling to 7.0903 per Dollar in the offshore market. A series of economic indicators have shown subdued consumer demand and signs the post-pandemic recovery has already come to an end.

"The PBoC (People's Bank of China) showed little intention to defend the (Yuan)," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.