Munir Younes – Nidaa Al-Watan
The weakness of the single European currency, the euro once morest the US dollar, began to appear in 2008 with the global financial crisis, which in Europe turned into a sovereign debt crisis. This crisis punished the European currency in terms of questioning its ability to withstand and continue in the face of a number of member states’ debt defaults. Thanks to the monetary policy pursued by the European Central Bank, and the efforts made by the European Union countries to control their budgets, the euro exchange rate has stabilized and has not deteriorated much, but rather returned and gained strength once morest the dollar later.
What are the main reasons for the weakness of the euro?
1 – Tails of the Corona crisis
2 – inflation
3 – Ukraine war
4- The energy crisis, especially gas
5- The role of the dollar as a relatively safe haven in crises
6 – The difference in US and European interests, which is currently in the interest of the dollar.
What’s in the details?
In the fall of 2021, the health crisis (Corona) in Europe returned to pressure economic growth expectations. Inflation has risen since last year due to that crisis and the closure of production sites in China. Then it worsened greatly with the repercussions of the war on Ukraine. This war not only raised the prices of raw materials, but also revealed the specter of an energy crisis hovering over Europe due to the expectation of cutting off Russian gas supplies, as well as the rise in oil prices.
The sum of these factors, to which we can add the effects of European sanctions once morest Russia, is putting pressure on confidence and stifling growth in the eurozone. Thus, the demand for the European currency in the money markets declined.
To these circumstantial and geopolitical factors are added monetary factors. The dollar is a safe haven in times of crisis. The attractiveness of the green currency has also increased with the rise in US interest rates once morest the decline in European interest rates. The US Federal Reserve, in order to combat inflation, has started, since last May, a new cycle of strong interest rate hikes. For the European Central Bank, it is at the beginning of a similar cycle. On July 21, he announced a 50 basis point hike on basic financing operations, lending and deposit facilities… but it remains much lower than the US rates ranging between 1.5 percent and 1.75% and is expected to increase further during the remainder of 2022.
What is the meaning of the parity of the exchange rate of the euro and the dollar?
It is the first time since 2002 that the two currencies are equivalent. On the eve of 2008, the price of the euro was 1.6 dollars, then it fell, and the strong decline accelerated in 2022.
A weak euro means a strong dollar: everything that is imported from the United States or “billed” in dollars becomes more expensive for the European. Also, travel to the United States and the dollarized countries becomes more expensive for the European. On the other hand, for Americans, vacationing in the old continent has become less expensive than before, with the rising purchasing power of the dollar.
Who benefits from a weak euro?
Besides the European tourism sector benefiting from the influx of Americans and others due to the weak euro, European exporting companies are benefiting from the weak euro: goods billed in euros are cheaper than before, especially for those paying in US currency. The countries that benefit the most are Germany and the Netherlands, where the industrial sectors are strong exporters. There are countries, such as France, that depend on the export of wine, luxury products, food products, the aviation industry… that find markets and demand in the United States, and other countries that run surpluses in US hard currency and import from Europe.
This benefit may not be complete, and may even diminish if the exported goods (and billed in dollars) require production of intermediate materials and products that are also imported in dollars, and thus have become more expensive than before due to the current strength of the US currency. The same is true for exported commodities that require energy to produce them. Energy prices are high and are driven by the (strong) dollar.
