FX.co ★ Five reasons for euro's decline in 2020

Fundamental differences between US and EU economies

According to analysts, the main reason for the euro crash, especially in the euro/dollar pair, is the difference between the European and American economies. The gap between them continues to widen. Over the past two years, experts have to regularly downgrade the outlook for the European economic growth unlike the US GDP growth. The American economy is expected to rise to 1.8 percent, while the eurozone economy will hardly add more than 1 percent. As a result, the euro is losing ground against the greenback.

Differences in monetary policy strategies

Another important difference between the European and American economies is considered to be different approaches to raising or lowering the key interest rate. For the most part, the views of the ECB and the Fed on this issue do not coincide. The European regulator believes that low interest rates should help to stimulate the economic activity, while the Federal Reserve pursues a stable monetary policy.

Euro becomes funding currency

At the end of 2019, the single European currency became a funding currency. This made the international currency status even more apparent. This trend continued in 2020. A funding currency is that one which is involved in the carry trade strategy. As a rule, the funding currency has a low interest rate. Market participants can borrow it and then sell to invest in a higher-yielding currency. Low interest rates make the euro an attractive funding currency but weaken its value.

Sharp decline in eurozone industrial production

The single currency is mainly weighed down by weak macroeconomic data on industrial production in the euro area. The European economy relies heavily on industrial production. Therefore, it is particularly vulnerable to any risks. Currently, China's coronavirus poses the greatest risk to the region's economy. The outbreak of this deadly virus can slow down the global economy. The eurozone industrial output slumped by 2.1 percent compared to market expectations of a 1.6 percent drop.

US dollar as safe-haven asset

The euro has been losing ground amid the stronger US dollar. The greenback is getting stronger mainly due to the weakening rival. In addition, the powerful American economy is boosting the currency. The outbreak of the Chinese coronavirus has become another driver for the stronger American dollar. The greenback has won favor with investors amid fears of the virus spread. In early 2020, the euro gave in to the US dollar which had been more highly-demanded as a safe-haven asset.