The negative influence of euro’s weakness exceeds positive aspects. Additionally, the low euro exchange rate could contribute to inflation even though it is not the biggest factor contributing to price growth, according to bank analysts.
SEB Bank macroeconomic expert Dainis Gaspuitis said companies focused on export outside Eurozone were the ones to benefit the most from the drop of euro exchange rate as long as prices were converted into US dollar, because it was slowly becoming more competitive.
He also mentioned this situation could continue helping Latvia grow US market’s role, because it was already its top-10 export market. In this case woodworkers would benefit the most, because export of lumber in the first five months of 2022 composed half of the total export worth EUR 253 million. Machines, mechanisms and electrical appliances follow with EUR 51 million.
This situation offers opportunities for exporters of Latvian goods on other markets using US dollar, added Gaspuitis, mentioning that in 47.5% of cases the EU paid for exports outside the bloc in euro and in 29.4% they used US dollar.
“The situation is different when it comes to imports,” stressed Gaspuitis, adding that import-focused companies were in an unfavourable situation – imported goods were becoming less competitive, more expensive, promoted inflation and reduced households’ purchasing power.
“For businesses that are dependent on raw materials and energy but export very little the weakness of euro will increase expenses that increase inflation. Considering that Europe’s exports consist of goods with high added value, the change in euro’s competitiveness is not a decisive factor,” said the economist. “This means the negative influence from euro’s weakness exceeds the positive aspects, especially when it comes to inflation.”
He also mentioned that the receipts of 48.1% of EU’s imported goods were paid in US dollar as opposed to 38.2% paid in euro.
Luminor economist Peteris Strautins said at the start of the year euro cost $1.12 now the two currencies had equalized.
“The euro value for US dollar is below the historical average, but not the lowest – it was 80 cents in 2000, when there was an enormous optimism about the US economy. In 2008, when the US felt the first shocks of a strong financial crisis but there were still illusions about Eurozone’s ability to dodge it, the average euro exchange was $1.6,” added Strautins.
He also said the drop in euro and US dollar course was dictated mainly by the growing difference between the outlooks for euro and US dollar exchange rates in the future. Analysts expect the US Central Bank will continue rapid increase of rates, because overheating of the economy remains a topical problem there. Inflation in Eurozone is also high, but it is dictated more by transient factors. The Russian-Ukrainian war has a much stronger effect on Europe. The risk of deficit of gas is on a rapid rise and the possibility of Eurozone’s recession is very high. This is why outlooks for the rise of euro interest rates are already revised downward.
“For the majority of Latvian residents these fluctuations will not affect their lives a lot. A low euro course can promote inflation, but this is not the biggest factor contributing to price rise at the moment. The biggest causes of this problem are the prices of petrol and food products on global markets, as well as the gas price in Europe and electricity price in Baltic States,” stressed Strautins.
At the same time, he said the fluctuation of US dollar exchange rate would affect some exporters.
Latvia mainly exports goods to countries that use euro or a currency tied to euro, such as Denmark or the Czech Republic.
“Latvian exports are regional. In May, the share of Baltic States alone was 30%, whereas the share of Eurozone countries was 57%. The share of US in Latvia’s exports was only 1-2%. Historically US dollar had a big role in trade with Russia and other post-USSR countries. However, Russia’s share in exports has since dropped to only 4%,” explained Strautins.
He also said that expensive US dollar did not have a decisive influence over exports. The dynamics of Latvia’s exports will be largely affected by price fluctuations of various products, as well as other factors, such as the change in prices of lumber, which will have a clearly reductive effect as opposed to what was experienced in recent years. Metalworking and mechanical engineering industries will be affected by the risk of recession of Eurozone. Export of tourism will benefit from the gradual lifting of epidemiological restrictions. Exports in the ICT sector and business services sector continue blooming thanks to very strong global demand, as well as dynamic development of relevant sectors in Latvia.
The euro exchange rate has been in decline for some time as a result of growing concerns about a possible recession in Eurozone.
The policy employed by the US Federal Reserve system, by rapidly increasing base interest rates, has increased the value of US dollar and has created pressure on euro, because the European Central Bank has a tighter monetary policy in mind. Concerns about Eurozone’s economy are increased further by the possible energy crisis, which could be caused by problems in efforts to reduce dependence on Russian energy resources and their replacement with energy resources from other countries. (BNN/Business World Magazine)
