The euro is hovering near parity with the dollar, falling to its lowest level in 20 years and even touching a one-to-one exchange rate with the US currency this week. It is a psychological barrier in the markets. But psychology is important, and what the euro’s slide underlines is a foreshadowing of the 19 European countries using the currency as they grapple with the energy crisis caused by Russia’s war in Ukraine.
Here’s why the euro is falling and its impact:
What is meant by Euro and Dollar Parity?
This means that European and American currencies are worth the same amount. A currency’s exchange rate can be a verdict on economic prospects, and Europe is disappearing. Expectations that the economy will see a rebound after the COVID-19 pandemic turns the corner are being replaced by predictions of a recession.
More than anything, high energy prices and record inflation are to blame. Europe is far more dependent on Russian oil and natural gas than the US to keep industry humming and generate electricity. afraid of war Ukraine The loss of Russian oil in the global markets has led to an increase in oil prices. And Russia is cutting off natural gas supplies to the EU, which EU leaders have described as retaliation for sanctions and arms deliveries to Ukraine.
Energy prices pushed euro-area inflation to a record 8.6% in June, making everything from groceries to utility bills expensive. He also fears that the government is rationing natural gas to industries such as steel, glassmaking and agriculture if Russia shuts down or shuts down its gas taps altogether.
A sense of doom mounted when the major Nord Stream 1 pipeline from Russia to Germany was shut down for scheduled maintenance on Monday, fueling fears the Kremlin would not resume deliveries this month.
“What is the euro fall saying? It is becoming increasingly clear that the euro area is headed for a recession,” Robin Brooks, chief economist at the International Finance Banking trade group, tweeted on Tuesday.
When was the last time the euro was equal to the dollar?
The value of the euro has not been less than $1 since 15 July 2002. Now it’s down to $1.01.
The European currency reached its all-time high of $1.18 shortly after its launch on January 1, 1999, but then began a long slide, falling from the $1 mark in February 2000 and a record low of 82.30 cents in October 2000. But reached. It rose above parity in 2002 as large trade deficits and accounting scandals weighed on the dollar on Wall Street.
Then as now, what appears to be the story of the euro is in many ways the story of the dollar. This is because the US dollar is still the world’s dominant currency for trade and central bank reserves. And the dollar has hit a 20-year high against not only the euro, but also the currencies of its major trading partners.
The dollar is also benefiting from its position as a safe haven for investors in times of uncertainty.
Why is the euro falling?
Many analysts attributed the euro’s fall to expectations of a faster interest rate hike by the US Federal Reserve to counter a 40-year high in inflation, which stood at 9.1% yearly on Wednesday.
As the Fed raises interest rates, the rates for interest-bearing investments go up as well. If the Fed raises rates higher than the European Central Bank, the higher interest return will attract investors’ money from the euro into dollar-denominated investments. Those investors would have to sell euros and buy dollars to buy those holdings. This moves the euro down and the dollar up.
The ECB has announced that it will raise interest rates next week and will make another hike in September. But if the economy sinks into recession, it could halt the ECB’s series of rate hikes. Meanwhile, the US economy looks stronger, which means the Fed could be tightening — and widening — the rate gap.
anyone win?
American tourists in Europe will get cheaper hotel and restaurant bills and admission tickets. A weaker euro could make European export goods to the United States more competitive on price. The US and the EU are major trading partners, so exchange rate changes will be noticed.
In the US, a stronger dollar means lower prices on imported goods—from cars and computers to toys and medical equipment—which could help moderate inflation.
“The equality makes it easier for us, and too much money now goes a long way, so we can do a lot on our travels,” said John Muldoon, who visited Rome this week from Delaware.
Olivia Navarrett, another tourist from Pennsylvania to Rome, said the exchange rate meant the shirt she bought was less expensive.
“It’s cheap to come here and buy stuff,” she said. “So I think it’s better to come here, and spend money here, than to spend money in America”
Who loses?
US companies that do a lot of business in Europe will lose revenue from those businesses when they bring those income back to the US. Is.
A major concern for the US is that a stronger dollar makes US-made products more expensive in foreign markets, widening the trade deficit and reducing economic output, while giving foreign products an edge in prices in the United States. Is.
A weak euro could be a headache for the European Central Bank as it could mean higher prices for imported goods, especially oil, which is denominated in dollars. The ECB is already being pulled in different directions: it is set to raise interest rates, the specific drug for inflation, but high rates can also slow economic growth.
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