(AP) — The euro slumped below par with the dollar, hitting a 20-year low and ending a one-to-one exchange rate with the US currency.
This is a psychological barrier to the markets. But the psychology is important, and the euro’s collapse underlines the fears of the 19 European countries that use the currency as they grapple with an energy crisis caused by Russia’s war in Ukraine.
Here’s why the euro fell and what the impact could be:
WHAT DOES EURO AND DOLLAR PARITY MEAN?
This means that European and American currencies have the same value. Despite continued volatility, the euro has dropped to just under $1 this week.
The exchange rate could be the end of the economic outlook, and Europe’s outlook is fading. After the COVID-19 pandemic, expectations for economic recovery have been replaced by recession forecasts.
Above all, high energy prices and record inflation are to blame. Europe is more dependent on Russian oil and gas than the United States to keep industries running and generate electricity. Fears that the war in Ukraine would lead to the loss of Russian oil on world markets drove oil prices higher. And Russia is cutting off natural gas supplies to the European Union, in what EU leaders call retaliation for sanctions and arms supplies to Ukraine.
Energy prices pushed up everything from markets to electricity bills, pushing eurozone inflation to a record 8.9% in July. They also voiced concerns that governments would have to allocate natural gas to sectors such as steel, glass and agriculture if Russia cuts further or shuts off gas taps.
The sense of doom increased when Russia reduced the Nord Stream 1 pipeline through Germany to 20% of its capacity and said the compressor station would be shut down for three days next week due to “scheduled maintenance”.
Natural gas prices on the European benchmark TTF soared to record highs amid supply disruptions, fears of further shutdowns and strong demand.
“If you think the euro is cheap on par, think again,” Robin Brooks, chief economist of the Banking Trade Group at the Institute of International Finance, said on Twitter on Monday. “German production has lost access to cheap Russian energy and therefore its competitive advantage.”
“A global recession is coming,” he said in a second tweet.
Inflation in the eurozone has hit another record as the currency bloc struggles to cope with the ongoing gas crisis. https://t.co/5ZdzYJhWFT
— Breitbart News (@BreitbartNews) August 1, 2022
WHEN WAS THE LAST THE EURO WAS EQUAL TO THE DOLLAR?
The euro was last below $1 on July 15, 2002.
The European currency reached an all-time high of $1.18 shortly after its launch on January 1, 1999, but then started a long decline, crossing the $1 mark in February 2000 and reaching an all-time low in October 2000. reached the level of 82.30 cents. It climbed above par in 2002 as a large trade deficit and Wall Street accounting scandals put pressure on the dollar.
What seemed like the history of the euro then, as it is now, is in many ways the history 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 hit a 20-year high against not just the euro but the currencies of major trading partners.
The dollar also benefits from its status as a haven for investors in times of uncertainty.
WHY IS THE EURO FALLING?
Many analysts attribute the euro’s decline to expectations of a rapid rise in interest rates by the US Federal Reserve to combat inflation near its 40-year high.
As the Fed raises interest rates, interest-bearing investment rates are likely to rise. If the Fed raises interest rates more than the European Central Bank, higher interest yields will attract euro investors’ money to invest in dollars. These investors 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 half a point more than expected for the first time in 11 years. Another increase is expected in September. But if the economy goes into recession, a series of ECBs could stop interest rate hikes.
Meanwhile, the US economy looks healthy, which means the Fed may continue to tighten rates and widen the rate gap.
Romanian parliamentarian Cristian Terges said: “Just as you cannot get yourself out of a hole with your own hair, neither can the government tax you out of poverty.” said.
— Breitbart London (@BreitbartLondon) 6 July 2022
WHO WON?
American tourists to Europe will find cheaper hotel and restaurant fares and entrance fees. A weaker euro could make European exports to the US more competitive. The USA and EU are the main trading partners, so the change in the exchange rate will be noticeable.
In the US, a stronger dollar means lower prices for imported goods, from cars and computers to toys and medical equipment, which could help lower inflation.
WHO LOSE?
American companies that do big business in Europe will see their profits fall if they bring those profits back to the US. If euro earnings stay in Europe to cover costs there, the exchange rate will no longer be an issue.
The main concern for the US is that a stronger dollar will make US-made goods more expensive in foreign markets, widening the trade deficit and lowering output, giving foreign goods a price advantage in the US.
A weak euro could be a headache for the European Central Bank, as it could mean higher prices for imported goods, especially oil priced in dollars. The ECB is already heading in different directions: It raises interest rates, a typical cure for inflation, but higher rates could also slow economic growth.
Source: Breitbart
