The lowest level in 20 years… What does the euro’s decline against the dollar mean?

The euro traded against $0.9998 on Wednesday, a precedent since the beginning of trading in the European currency, before recording a new high, down by about 12 percent since the beginning of the year, the lowest level since 2002.

Analysts and economists believe that the decline in the price of the euro against the dollar has many effects, while it represents a positive factor for eurozone exporters who may see an increase in demand for their relatively cheaper goods, but it makes imports more expensive, which increases inflation concerns and increases the prices of goods and products. .

The euro suffers from several crises, led by the Russian-Ukrainian war, which contributed to the rise in oil, gas and food prices, in addition to the central bank’s delay in raising interest rates despite the highest inflation rates in nearly 40 years.

For years, European policymakers have welcomed a weak currency as a way to stimulate economic growth, as it makes the bloc’s exports more competitive. But now, with inflation in the eurozone at its highest levels since such records began, currency weakness is no longer desirable because it promotes higher prices by making imports more expensive.

On top of those who warned against the euro’s depreciation against the dollar, ECB Governing Council member Francois Villeroy de Gallo said that the bank would carefully monitor developments in the effective exchange rate, as an important driver of imported inflation.

He stressed that “the decline in the price of the euro in its current form will contradict our goal of price stability.”

A paper published by the European Central Bank in 2020 estimated that a 1 percent depreciation of the euro against a basket of currencies could add up to 0.11 percentage points to inflation within a year, and 0.25 percentage points over three years.

repercussions of war

In turn, the economic analyst and professor of finance and investment, Mustafa Badra, believes in exclusive statements to “Sky News Arabia”, that “simply; the currency”.

Badra stressed that “the significant decline, which has not occurred in 20 years, reflects the precarious economic situation as a result of the Russian-Ukrainian war, the effects of sanctions on Moscow and the counter-sanctions imposed by the Russian regime on Europe and the United States, which put great pressures on the currency.”

The economic analyst expected that there would be more decline for the euro with the US Federal Reserve’s decision to raise the interest rate again, and this affects the investment conditions in the whole world.

Russian threats

European analysts had warned that “the euro may not have reached its lowest levels due to the continuing risks of the threat to cut off Russian gas, which could push the region into a deep recession.”

European estimates suggest that this scenario could in turn significantly constrain the ECB’s ability to raise interest rates, which it has not done so far.

Russia does not compromise in dealing with the gas card, as it has reduced supplies to some European Union countries, and recently cut the flow in the Nord Stream pipeline to Germany by 60 percent.

“How far can the euro’s decline go? It probably depends on Russia’s desire to aggravate the economic war with Europe,” says analyst Jane Foley at financial services firm Rabobank.

He pointed out that “knowing the intentions of Russian President Vladimir Putin, is not easy,” according to Agence France-Presse.

This comes at a time when the US Federal Reserve is heading towards a new interest rate increase of 75 basis points later this month, as it seeks to curb rapid inflation, according to a report published by the New York Times.

Badra said that the US Federal Reserve announced its intention to raise the interest rate several times during the current year, which will have a return on all types of investment, whether in currencies, stock exchanges, or psychological metals, as well as commodities, crops and oil prices.

In June, consumer prices in the euro area jumped 8.6 percent from the previous year. Some monetary policy makers highlighted the weakness of the euro as a risk to the central bank’s target of returning inflation to 2 percent in the medium term.

Effects on Euro Holders

Badra pointed out that the holders of the euro will be severely affected by this decline against the dollar, as the value of their investments will decline, in addition to the decrease in the import capacity, driven by the decline in the currency.

“If the euro continues to fall, there is no doubt that the European Central Bank will be very concerned about this move,” says Chris Turner, an economist at investment bank ING.

“Faced with the looming threat of a recession, the European Central Bank’s hands may be constrained in its ability to maneuver higher interest rates in defense of the euro,” he explained.

In addition, Mustafa Badra says: “The global effects of the war in Ukraine became clear in the euro area, with the currency declining significantly.”

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