Euro has reached parity with the dollar for the first time in 20 years
As we have not seen in the last 20 years, the value of the euro has dropped. The euro dollar parity of these currencies can be advantageous for some people but also extremely drastic for the economy.
by José Gonçalo
Euro drops to historic lows against the dollar
As you read this article, American tourists in Europe are celebrating the euro-dollar parity. Indeed, in twenty years, it is the first time that the Euro has the same value as the dollar.
In recent weeks, the price of the euro against the euro has dropped significantly. Now, these currencies fluctuate their values in a range that tends to parity.
On June 21, for example, 1 euro was worth 1.02 dollars, about the same amount. However, this is not the first time this has happened this year.
On the 13th of this month, The New York Times published an article recording this fact. However, this was a move that investors had been predicting for some time.
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In April of this year, Jordan Rochester, a strategist at Japanese bank Nomura, had already indicated that we would see a euro-dollar parity in the near future.
Estimates from JPMorgan Chase and HSBC indicate this same movement.
However, what surprised the market was the speed with which this happened. In his hypotheses, Rochester believed that this level would only be reached at the end of August.
In fact, experts believe that the euro’s fall was mainly due to the moment of uncertainty experienced in the eurozone.
Since the beginning of the year, the conflict between Russia and Ukraine has “placed a question mark” on the world’s oil supply.
In fact, this climate affects Europe much more, which is extremely dependent on fuels coming from Russia.
In fact, a special episode of this war contributed to the euro’s decision: the shutdown of the Nord Stream 1 gas pipeline. This is the main route for transporting gas from Russia to Europe.
Today, July 21, it was reactivated, but the climate of uncertainty remains even more alive.
What the decrease in value of the Euro means for the world economy?
In fact, the euro-dollar parity by itself means nothing to economists. So these are just rounded numbers, 1=1.
But for Robin Brooks, chief economist for the banking trade group at the Institute of International Finance, it illustrates a trend.
For this economist, the eurozone is entering a recession. The euro-dollar parity, then, is a way of making this clear.
Other economists explain that this move is a response to the recent hike in the benchmark interest rate made by the Federal Reserve.
When interest rates go up, loans and credit card debt get more expensive. However, bonds that yield at that interest rate become more profitable.
In addition, this type of asset is a way of “protecting” money from the variability of riskier assets.
After all, when a recession is feared, the returns from this type of investment do not justify the risks they offer. So investors are selling their euros to invest in dollars.
The Federal Reserve is expected to raise interest rates further by the end of this year.
In addition, most investors understand that the US economy is much more robust. Thus, we would be better able to continue raising the basic interest rate without going into recession.
On the European side of the map, the European Central Bank would not have the same “breath” to keep raising interest rates. So, with so many people wanting to sell their euros, the price of this currency tends to fall.
Better for the dollar, which is more valued. Also better for those who buy European products or travel to the old continent.
After all, your money will pay off more. However, bad for those who have investments on the other side of the world.
To convert their euros into dollars, these investors will lose part of the amount.
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Euro drops to dollar parity – what comes next?
In fact, the euro-dollar parity has no immediate economic ramifications. However, this fall in the euro could change the confidence that people have in that currency. As Jordan Rochester points out, the market is also driven by people’s feelings.
That way, if many understand that it’s time to switch currencies to protect themselves, the European recession can be anticipated. Meanwhile, on the other side of the Atlantic, the Federal Reserve continues its policy of economic tightening.
After an accumulated increase of 75 this year, everything indicates that further adjustments will take place in the basic interest rate. This creates pressure on the Euro Central Bank.
However, Europe lags behind the US in terms of supply chain restoration. Thus, with an economy still returning to normal, the continent cannot keep pace with the American economic squeeze.
After all, this can trigger a recession. If the US and the Eurozone enter into recession together, this scenario would be more positive for the US. At least that’s what George Saravelos, global head of foreign exchange research at Deutsche, suggests.
In this situation, the dollar will become, more than ever, a safe haven for investors. So, in the future, we can expect the exchange rate to remain at a value close to 1 or to present slight drops below this level.
So, if you are going to vacation in Europe this summer, the euro-dollar parity will be to your advantage.
However, this could be a bad sign for global economic health. What are the risks of entering a recession? Check out our post below and read a full article on the topic!
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