The euro exchange rate against the dollar rises to its highest level in a year and a half on Tuesday, as one euro is worth $1.1261, the most expensive since February 2022.
In response to skyrocketing inflation in Europe, the European Central Bank (ECB) has increased interest rates several times in recent months, as hiking interest rates is the main way that central banks tend to deal with inflation.
The US Central Bank (US Federal Reserve or Fed) also raised interest rates sharply, and in February, raised its benchmark interest rate by 0.25 percentage points to a target range of 4.5%-4.75%, its highest level since 2007.
However, inflation there has eased in recent months, fuelling speculation about the Fed possibly lowering interest rates. It will likely have to raise interest rates one more time, and then start thinking about a rate cut.
This has resulted in the dollar weakening and subsequently a rise in the euro exchange rate. The fact that the economic sentiment in the eurozone has moderately improved also played a role in this. Meanwhile, the ECB will likely increase interest rates next week, which could see the value of the euro against the dollar increase even more.
For European consumers, this is good news as buying products from the United States will become cheaper for them. However, the euro's strong exchange rate is less good news for European companies, especially those that rely on exports as it damages their competitiveness, with costs rising against competitors outside the eurozone.
When interest rates rise, it becomes more interesting on a global scale to start investing in a currency and the value of the currency goes up.
In September last year, the Euro fell to $0.9883, marking the lowest rate on record since December 2002, with uncertainties about the state of the European economy weighing heavily on the value of the eurozone's currency at the time.
