The depreciation in the euro to its lowest level in almost two decades against the dollar this week in large part reflects investors’ view that the ECB will tighten less aggressively than the Fed. The apparent lack of concrete progress on the so-called Transmission Protection Mechanism has only reinforced that opinion. In any case, we suspect it could still take some time to agree all the details, risking another sell-off in peripheral bond markets and perhaps pushing the euro below parity with the dollar.
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