The euro fell 2.2% in two weeks, after the ECB raised rates

The European Central Bank raised its deposit rate by a quarter point to 2.50% on 10 September. The euro closed that day at $1.1629. By 24 September it was at $1.1373, down 2.2% and at its lowest since 23 July. It ended the week at $1.1400.

A rate increase usually lifts a currency. This one did not, because the Federal Reserve raised rates six days later and signalled that it would go further. The broad dollar index, which measures the dollar against the currencies of the main US trading partners, rose 2.1% between 10 and 24 September.

Two increases in Frankfurt

For the ECB, September was the second step. It cut its deposit rate eight times between June 2024 and June 2025, from 4% to 2%. It then raised it to 2.25% in June this year, and to 2.50% in September.

The reason is the same as in Washington. The ECB said that “The conflict in the Middle East continues to generate inflation pressures”, and that inflation “is set to remain well above target for an extended period”. Its staff see inflation at 3.0% this year, 2.5% in 2027 and 2.1% in 2028, with the last two years revised up since June.

The latest figures from Eurostat show the shock. Euro area inflation rose from 1.9% in February to 3.2% in August. Energy prices were 3.1% lower than a year earlier in February, and 14.3% higher in August.

Why the dollar still won

Currency markets trade the path of rates more than the last move. The ECB said that it “is not pre-committing to a particular rate path”, and that it will follow “a data-dependent and meeting-by-meeting approach”. The Fed was more direct. Its projections show the median official expecting one more increase this year.

Market prices show the gap. On 28 September, CME FedWatch put the chance of a Fed increase on 28 October at 70.9%. Central Bank Watch, which uses a similar method on euro money-market rates, put the chance of an ECB increase on 29 October at 30.7%.

Underlying inflation helps explain the difference. In the euro area, inflation excluding energy, food, alcohol and tobacco was 2.4% in August, the same as in February. In the US, the core PCE price index rose 3.3% in the year to July, up from 3.0% in February. The energy shock is spreading further through the US economy, so the Fed has more work to do.

The gap in rates is already wide. After both increases, the Fed’s target range is 3.75% to 4%, and the ECB’s deposit rate is 2.50%. Money earns more in dollars, and the market expects the difference to grow.

Two shocks, one currency

For an economy that buys its oil abroad, a higher oil price is a loss of income as well as a rise in prices. A weaker euro adds to the bill, because oil is priced in dollars.

The numbers show how much. Spot Brent fell 5.0% in dollars between 10 and 22 September, from $120.98 to $114.89 a barrel. In euros it fell only 3.4%, because the euro fell over the same days. Between 27 February and 22 September, Brent rose from €60.33 to €100.50 a barrel, up 67% in euros against 61% in dollars.

This is the bind for the ECB. A weak euro keeps imported inflation high, which argues for more increases. But the energy shock also takes income from households and companies, which argues for caution. Its staff still see growth of 0.9% this year and 1.4% in 2027, forecasts that were revised up in September.

What to watch

The Fed decides on 28 October, and the ECB a day later, on 29 October. If the Fed raises rates again and the ECB waits, the gap between the two will widen, and the euro is likely to stay under pressure.