It is a psychological barrier in the markets. But psychology matters, and the euro’s decline underscores the hunch of the 19 European countries using the currency as they battle an energy crisis caused by Russia’s war in Ukraine.
Here’s why the fall of the euro is happening and what impact it could have:
WHAT DOES EURO AND DOLLAR PARITY MEAN?
This means that European and American currencies are worth the same amount. Although constantly moving, the Euro fell just below a value of $1 this week.
A currency’s exchange rate can be a verdict on the economic outlook, and those in Europe are fading. Expectations that the economy would rebound after turning the corner from the COVID-19 pandemic have been replaced by predictions of a recession.
Natural gas prices on European benchmark TTF hit record highs amid shrinking supply, fears of further cuts and strong demand.
“If you think the euro at par is cheap, think again,” Robin Brooks, chief economist of the banking trade group at the Institute of International Finance, tweeted on Monday. “German manufacturing industry has lost access to cheap Russian energy and thus its competitive advantage.”
“Global recession is coming,” he said in a second tweet.
WHEN WAS THE LAST TIME THE EURO WAS EQUAL TO THE DOLLAR?
The euro was last valued below $1 on July 15, 2002.
The European currency hit its all-time high of $1.18 shortly after its launch on January 1, 1999, but then began a long slide, breaking the $1 mark in February 2000 and hitting a record low of 82.30 cents in October 2000. It broke above parity in 2002 as large trade deficits and accounting scandals on Wall Street weighed on the dollar.
Then as now, what appears to be a euro story is also in many ways a dollar story. This is because the US dollar is still the dominant currency in the world for trade and central bank reserves. And the dollar has hit 20-year highs against the currencies of its major trading partners, not just the euro.
The dollar also benefits from its status as a safe haven for investors in times of uncertainty.
When the Fed raises interest rates, interest-bearing investment rates also tend to rise. If the Fed raises rates more than the European Central Bank, higher interest yields will draw investors’ money away from euros into dollar-denominated investments. These investors will have to sell euros and buy dollars to buy these assets. This causes the euro to fall and the dollar to rise.
Last month, the ECB raised interest rates for the first time in 11 years by half a percentage point higher than expected. He is expected to add another increase in September. But if the economy slides deeper into recession, that could halt the ECB’s run of rate hikes.
American tourists in Europe will find cheaper hotel and restaurant bills and admission tickets. The weaker euro could make European export goods more price competitive in the United States. The US and the EU are major trading partners, so the exchange rate change will be noticed.
In the United States, a stronger dollar means lower prices for imported goods – from cars and computers to toys and medical equipment – which could help moderate inflation.
American companies that do a lot of business in Europe will see the revenues of those companies decline when and if they bring those revenues back to the United States. If the euro income stays in Europe to cover the costs there, the exchange rate becomes less of an issue.
A major US concern is that a stronger dollar will make US-made products more expensive in foreign markets, widen the trade deficit and reduce economic output, while giving foreign products an edge. on prices in the United States.
A weaker euro can be a headache for the European Central Bank as it can mean higher prices for imported goods, especially oil, which is priced in dollars. The ECB is already being pulled in different directions: it is raising interest rates, the typical inflation remedy, but higher rates can also slow economic growth.
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