The euro falls below parity with the dollar. What is the impact ? | Health, Medicine and Fitness
By The Associated Press
euro fell below parity with the dollarplunging to a 20-year low and ending a one-to-one exchange rate with the US currency.
It is a psychological barrier in the markets. But psychology is important, and the fall of the euro underlines the hunch of the 19 European countries using the currency as they fight a energy crisis caused by Russia’s war in Ukraine.
Here’s why the fall of the euro is happening and what impact it could have:
WHAT DOES EURO AND DOLLAR PARITY MEAN?
This means that European and American currencies are worth the same amount. Although constantly moving, the Euro fell just below a value of $1 this week.
People also read…
The exchange rate of a currency can be a verdict on the economic outlook, and those of Europe are fading. Expectations that the economy would rebound after turning the corner from the COVID-19 pandemic have been replaced by predictions of a recession.
More than anything, high energy prices and record inflation are to blame. Europe is much more dependent on Russian oil and natural gas than the United States to run industry and generate electricity. fears that the war in Ukraine will lead to a loss of Russian oil on world markets pushed up oil prices. And Russia cuts natural gas supplies to the European Union, which EU leaders described as retaliation for sanctions and arms deliveries to Ukraine.
Energy prices pushed up Eurozone inflation at a record 8.9% in July, doing everything races to higher utility bills. They also raised fears that governments need to ration natural gas to industries such as steel, glassware and agriculture if Russia further reduces or closes gas taps altogether.
The feeling of unhappiness increased as Russia has reduced flows through the Nord Stream 1 gas pipeline in Germany at 20% capacity and stated that it turn it off for three days next week for “routine maintenance” of a compressor station.
Natural gas prices on the European reference TTF have reached records amid dwindling supplies, fears of further cuts and high demand.
“If you think the euro at par is cheap, think again,” Robin Brooks, chief economist of the banking trade group at the Institute of International Finance, tweeted on Monday. “German manufacturing industry has lost access to cheap Russian energy and thus its competitive edge.”
“Global recession is coming,” he said in a second tweet.
WHEN WAS THE LAST TIME THE EURO WAS EQUAL TO THE DOLLAR?
The euro was last valued below $1 on July 15, 2002.
The European currency hit its 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 hitting a record low of 82.30 cents in October 2000. It broke above parity in 2002 as large trade deficits and accounting scandals on Wall Street weighed on the dollar.
Then as now, what appears to be a euro story is also in many ways a dollar story. This is because the US dollar is still the dominant currency in the world for trade and central bank reserves. And the dollar has hit 20-year highs 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.
When the Fed raises interest rates, interest-bearing investment rates also tend to rise. If the Fed raises rates more than the European Central Bank, higher interest yields will draw investors’ money away from euros into dollar-denominated investments. These investors will 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 raises interest rates for the first time in 11 years by half a percentage point above expectations. He is expected to add another increase in September. But if the economy slides deeper into recession, that could halt the ECB’s run of rate hikes.
During this time, the The US economy looks more robustwhich means that the Fed could continue to tighten and widen the spread.
American tourists in Europe will find cheaper hotel and restaurant bills and admission tickets. The weaker euro could make European export goods more price competitive in the United States. The US and the EU are major trading partners, so the exchange rate change will be noticed.
In the United States, a stronger dollar means lower prices for imported goods – from cars and computers to toys and medical equipment – which could help moderate inflation.
American companies that do a lot of business in Europe will see the revenues of those companies decline when and if they bring those revenues back to the United States. If the euro income stays in Europe to cover the costs there, the exchange rate becomes less of an issue.
A major US concern is that a stronger dollar will make US-made products more expensive in foreign markets, widen the trade deficit and reduce economic output, while giving foreign products an edge. on prices in the United States.
A weaker euro can be a headache for the European Central Bank as it can mean higher prices for imported goods, especially oil, which is priced in dollars. The ECB is already being pulled in different directions: it is raising interest rates, typical medicine for inflationbut higher rates can also slow economic growth.
Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.