Affected by European economic stagnation and quantitative easing by the European Central Bank (ECB), the euro dropped to 9-year low of 1.1753 against the US dollar on Jan. 10, 2015.

The sluggish European economy is weighing down the euro. The US dollar, propped up by a recovering US economy, has been getting stronger. Unlike the US, Europe is not yet free of its economic crisis. European manufacturing still lacks vitality. The inflation rate is still below 2%, the target set by ECB. This will increase the risk of deflation.

There are two reasons why the weak euro will continue. First, the ECB has twice reduced its interest rate, which makes it difficult to support the value of the euro. Second, Greece is likely to exit the eurozone. If this happens, it will make a dent in investor confidence in the European market. In these circumstances, several international investment banks expect that the euro will continue to weaken.

The impact of a weaker euro on China’s economy is limited. The EU is China’s largest trade partner, so a weak EU economy and euro will have a negative influence on China’s exports to the EU. Chinese companies engaged in exporting to the EU market are likely to suffer substantial losses.

On the other hand, Chinese customers may benefit from a weak euro, which will increase the purchasing power of Chinese tourists to the European countries. With the restructuring of its economy, China will be less dependent on foreign trade. Overall, a weak euro has only a limited effect on China.

This article was edited and translated from 《欧元贬值为何创出九年新低》, source: People's Daily Overseas Edition, Author:Zhou Xiaoyuan