The euro has received heavy blows against the US currency since Russia’s invasion of UkraineThe European currency fell to a 20-year low as rising gas prices and uncertainty over Russian energy supplies raised recession fears in the euro zone.
The common European currency traded as low as around $1.0007 on Tuesday (July 12, 2022), which was a quick drop from $1.15 before Russia launched the war in Ukraine. The sharp drop brought the euro close to parity against the US dollar for the first time since late 2002.
Why is the euro declining?
The decline in the economic outlook in the euro area amid a rise gas prices And fears that Russia will cut off energy supplies will lead to a drop in the single currency. The heavy dependence of major economies such as Germany and Italy on Russian gas has left investors on edge, with economists predicting a faster and more painful recession in the eurozone than in the United States.
Another explanation is the difference in interest rate levels in the US and the Eurozone. While the US Federal Reserve was raising interest rates aggressively to curb rates inflationresist European Central Bank Impose any real increases.
“The interest rate in the US is expected to rise to 3% compared to 1% in Europe. So, the money will go to the place with the highest return,” says Karsten Bryssky, chief financial officer at ING Banking Group in an interview with DW.
The US dollar is also benefiting from its attractiveness as a safe haven, amid the uncertainty associated with global economies. Investors are comfortable with the relative safety of the dollar being less exposed to some major global risks at the moment.
Equalization of the euro and the dollar
Parity basically means that one US dollar is now buying one Euro, which is nothing more than a psychological threshold for market participants who are known for their fondness for whole numbers. “Financial markets always like to find some kind of symbolic meaning,” explains Briceski.
For his part, researcher in the field of financial speculation Viraj Patel believes that the level of parity between euro And the dollar can be a point at which financial speculators shut down the way the European currency is going.
“Recently, we are starting to see investors betting on a bigger drop in the euro to below parity. But you can equally imagine that more investors will start buying the euro as we approach that low,” said Viraj, an expert at Vanda Research.
How does a weak euro affect the consumer
A slide in the euro would add to the burden on European households and companies already suffering from record-high inflation. A weaker euro would make imports, which are mostly in dollars, more expensive. When these imported materials are raw materials or intermediate goods, their higher costs can further increase domestic prices. “There will be a greater burden on the European economy as a result of a weaker euro,” Battle said.
In normal times, a weak currency is seen as a good omen for exporters and export-heavy economies such as Germany, because a lower currency will boost exports as they become cheaper. However, these are not normal times thanks to disruptions in the global supply chain, sanctions andThe war in Ukraine.
“In the current situation with the geopolitical tensions that we are seeing, I think the benefits of a weaker currency are few compared to the disadvantages and disadvantages,” Briceski said.
For American travelers heading to Europe this summer, a weaker euro is a boon. For example, they will be able to exchange $1,000 for €1,000 compared to less than €900 in February. For companies that import European goods, the goods will be cheaper at the dollar’s expense.
Are there other lows?
Bets are currently increasing that the Euro will continue to decline against the Dollar in the coming days as the energy crisis in Europe worsens.
According to the expert, Patel, “The euro is currently trading as if an expected crisis in Europe will happen soon, so we may hear more bad news in rates. Euro exchangeto be less than a dollar.
Financial experts at Nomura International Holdings expect the euro to fall to the cusp of $0.95. George Zaravelos, head of foreign exchange at Deutsche Bank, has similar expectations. “A move to $0.95 to $0.97 would match the exchange rate caps,” he wrote in a July 6 note to clients.
What does a weak euro mean for the European Bank?
A weak euro and inflation will add to the challenges for the European Central Bank, which is already facing significant financial challenges due to its slowdown in the fight against inflation. To make matters worse for the central bank, which has powers to rein in inflation, the euro has weakened not only against the dollar, but also against other currencies such as the Swiss franc and the Japanese yen.
“The decline in the euro exchange rates may increase the range of euro weakness against other currencies, and thus become a larger inflation problem for the European Central Bank,” Battle said.
intends European Central Bank It will raise interest rates by 25 basis points next week, its first increase in more than 10 years. “The weakness of the euro supports the view of raising interest rates more aggressively,” Brzeski said.
However, some experts say that the economic downturn will put the European Central Bank in a bind, which will prevent it from making a significant rate hike, which would keep the euro’s rates low against the dollar.
Ashutosh Bindi/ Alaa Gomaa