The euro fell below the dollar, fell to its lowest level in 20 years, ending the one-to-one exchange rate with the US currency.
It is a psychological barrier in the markets. But psychology matters, and underscores the euro’s foretaste decline in 19 European currency-using countries as they grapple with an energy crisis triggered by the Russian war in Ukraine.
Next, we explain why the euro’s decline occurs and what impact it can have:
What does the difference between the euro and the dollar mean?
This means that European and American currencies are equal to the same thing. Despite the constant fluctuation, this week the Euro fell just below the value of $1.
A currency exchange rate can be a verdict on economic prospects, and the exchange rate has faded in Europe. Expectations that the economy will recover after overcoming the COVID-19 pandemic have been replaced by predictions of a recession.
The blame lies, above all, on high energy prices and record inflation. Europe relies on Russian oil and natural gas far more than it does on the United States to keep its industry and electricity generation going. Fears that the war in Ukraine was losing Russian oil on world markets led to higher oil prices. Russia has cut off natural gas supplies to the European Union, which EU leaders have described as a response to sanctions and arms supplies to Ukraine.
Energy prices pushed eurozone inflation to a record 8.9% in July, making everything from food to utility bills more expensive. They have also raised concerns that governments will have to ration natural gas in industries such as steel, glass and agriculture if Russia continues to reduce its gas taps or shut down completely.
The sense of doom increased when Russia cut flows through its Nord Stream 1 pipeline to Germany to 20% and said it would shut down for three days next week for “routine maintenance” on a pressure plant.
European TTF natural gas prices soared to record levels amid dwindling supplies, fears of more outages and strong demand.
“If you think the euro is equally cheap, think again,” Robin Brooks, chief economist at the Institute for International Financial Banking Group, wrote on Twitter yesterday. “German manufacturing has lost access to cheap Russian energy and thus has lost 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 last time the euro traded for less than a dollar was 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 began a long slide, breaking the $1 mark in February 2000 and reaching an all-time low of 82.30 cents in October. 2000. In 2002 it broke parity, as large trade deficits and Wall Street accounting scandals weighed on the dollar.
Then, as now, what appears to be the story of the euro is also 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 reached its highest levels in 20 years 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.
Why does the euro fall?
Many analysts attribute the euro’s decline to expectations of a rapid rate hike by the US Federal Reserve to combat inflation, which has reached its highest levels in 40 years.
When the Federal Reserve raises interest rates, interest rates on interest-bearing investments tend to rise as well. If the Fed raises interest rates more than the European Central Bank, the higher interest yields will attract money from euro investors to dollar-denominated investments. These investors will have to sell euros and buy dollars to acquire these shares. This causes the euro to fall and the dollar to rise.
Last month, the European Central Bank raised interest rates for the first time in 11 years by half a percentage point more than expected. It is expected to add another increase in September. But if the economy sinks into recession, it could halt the ECB’s series of rate hikes.
In the meantime, the US economy looks more robust, which means that the Fed can continue to tighten monetary policy and expand the rate spread.
American tourists in Europe will find hotel and restaurant bills and tickets cheaper. A weaker euro could make European export products more price competitive in the United States. The United States and the European Union are important trading partners, so the change in the exchange rate will be noticeable.
In the US, a strong dollar means lower prices for imported goods – from cars and computers to toys and medical equipment – which may help moderate inflation.
American companies that do a lot of business in Europe will see a shrinkage in revenue from those companies when and if they return those profits to the United States. If profits remain in euros in Europe to cover costs there, the exchange rate becomes less important.
One of the main concerns of the United States is that a strong dollar makes American-made products more expensive in foreign markets, widening the trade deficit and reducing economic output, while giving foreign products a price advantage in the United States.
A weaker euro could be a nuisance to the European Central Bank as it could mean higher prices for imported goods, especially oil, which is priced in dollars. The European Central Bank is already being pulled in different directions: it raises interest rates, the usual medicine for inflation, but higher rates can slow economic growth as well.