Euro, Sterling Struggle Against Dollar as Energy Shock Threatens Growth

The euro and sterling have attempted to recover against the US dollar, but their modest improvements conceal a more complicated shift in European foreign-exchange markets. Investors are now focused on whether renewed energy inflation will force either the European Central Bank or the Bank of England to tighten policy again, despite fragile economic growth.

The euro has edged higher after falling to a nine-day low, while sterling has recovered modestly from its recent weakness. However, neither currency's move represents a decisive rejection of the stronger dollar, which remains supported by elevated US Treasury yields and demand for safer assets.

Higher interest-rate expectations would normally strengthen both currencies, but the reason for these rising expectations is precisely what threatens their economies: oil prices have returned to around $100 a barrel. This has investors discussing the possibility of stagflation, and transportation costs are climbing.

The euro's rate advantage appears uncomfortable, as it is being offered higher rates alongside weaker growth. The European Central Bank kept its deposit rate unchanged at 2.25% on Thursday but left the door open to another increase as policymakers assess whether the latest energy shock will spread into wages, services, and broader consumer prices.

The eurozone remains vulnerable to a sustained increase in oil and gas prices because it imports a large portion of its energy requirements. This means that the same shock pushing the ECB toward higher rates is also weakening household purchasing power, raising manufacturing costs, and threatening a region already struggling to generate convincing growth.