Fed's rate hike increases pressure on EU economy

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Fed's rate hike increases pressure on EU economy

The euro and US dollar banknotes were pictured in August 23, 2022 in Madrid, Spain. A stronger US dollar arising from the Federal Reserve's aggressive interest rate hikes has increased pressure on the European economy, leading to higher inflation and energy costs, according to European economists.

Philipp Lausberg, a policy analyst at the think-tank European Policy Centre, said that the Fed has increased interest rates much more aggressively than the European Central Bank ECB. This will likely lead to a further weakening of the euro to the dollar.

He said that a stronger dollar will make imports more expensive to the EU, leading to a higher inflation rate, which could lead to tighter lending conditions.

Lausberg told Xinhua that the EU imports a large share of the EU's raw materials, which are denominated in dollars, will rise. It would concern resources such as oil, gas, rare earths, and metals, but also other components that are part of the global value chains the EU economy depends on. Lausberg said that a contraction in the US monetary policy poses significant risks to the EU economy and its financial system. European banks are relatively resilient, but very high fed interest rates can endanger financial stability in the EU. James Knightley, ING Chief International Economist, told Xinhua that the European trade deficit went from being a consistent surplus to a persistent trade deficit.

The EU's growth outlook remains gloomy because of the strains that high natural gas and electricity prices are putting on households and businesses in European countries, Knightley said.

The dollar is getting a boost from interest rates and the change in Europe's trade position that has had a major impact on the foreign exchange market, he said.

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The effects of the Fed rate hike are felt outside Europe. There is talk that the bank of England might have to do something to stem the decline in sterling, as Japan has already intervened, Knightley said.

According to Knightley, the G 10 Finance Ministers' meeting in 1971, the dollar is our currency, but it's your problem, according to the famous quote by US Treasury Secretary John Connally.