The Euro has dropped almost 10% against the Dollar in a matter of mere weeks and everyone is wondering why. Setting aside the factors which favor the Dollar generally (irrespective of the Euro) because they were explored in previous posts, let’s instead examine those factors weighing specifically in the Euro. First, the recent decline in commodity prices is causing European inflation to abate. The Euro had previously derived significant support from the ECB’s hawkish stance towards fighting inflation. With lower prices, however, the need for further rate hikes may have evaporated. Second, the Euro-zone economy is looking increasingly fragile. Based on the most recent data, it actually contracted in the second quarter. Truth be told, the ECB hasn’t yet turned its attention from inflation to the economy, but if both prices and economic growth continue to slow, the Central Bank may be forced to loosen its monetary policy. In fact, the perceived inevitability of this fate may already be propelling traders to dump the Euro. Money and Markets reports:

While upping his concern for the euro economy, European Central Bank President Trichet has maintained his focus on rising prices. The latest predictions…however, point towards inflation having already peaked…

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