With the euro and the dollar par, it can now be said that the years of strength in the single European currency are over.
The euro was regarding $1.6 in 2008.. At the time, many Europeans vacationing abroad, especially in the US, enjoyed hotels and cheap food, came home with suitcases full of electronics and clothes because of the purchasing power of the euro.
Today, the European currency reached its lowest level in 20 years, reaching Parity with the dollarAt a time when fears of an economic recession are growing in Europe, in the context of rising inflation and increasing uncertainty regarding the continuation of Russian gas supplies.
Europe is caught between two pincers: the economic consequences of the war in Ukraine and the European Central Bank’s decision to keep interest rates low.
Euro Fall Journey
The depreciation of the euro came amid an energy crisis in Europe caused by the Russian invasion of Ukraine. There is concern that this crisis might create an economic recession with unforeseen consequences, a specter that appeared on Monday, when Russia cut off gas supplies through the “Nord Stream 1” pipeline that feeds Germany, Europe’s largest economy.
Russian energy giant Gazprom has begun maintenance of the pipeline for 10 days, but Germany and other European countries are anxiously watching whether the gas will then return to the flow, as Russia can seize the opportunity and promote the use of gas as a weapon in the Ukraine crisis.
Added to this conflict is the blow that the euro has received from the difference in the speeds of the US Federal Reserve and the European Central in terms of tightening monetary policy, as interest rates are rising faster in the United States, and this attracts capital to the largest economy in the world.
For investors, yields on US Treasuries are higher than those of European bonds, which makes them prefer the dollar over the euro. From this perspective, the European Central Bank is in a difficult position, as it tries to rein in inflation and, at the same time, mitigate the slowdown in the economy.
The eurozone has not yet begun to raise interest rates. It is expected to do so at the ECB meeting at the end of July, but if it does, it will be at a slower pace.
penetration of consumers pockets
With inflation in the Eurozone hitting its highest level since records began at 8.6%, the devaluation of the single currency is raising the cost of living by raising the cost of imports.
In circumstances other than what the world is experiencing now, a weaker currency is not necessarily bad news for governments who use it as a means of spurring economic growth as exports become more competitive.
But the situation is different now, every time the dollar continues to rise, it costs more to buy a barrel of oil in euros. This is why a weak euro has contributed to fuel prices jumping to all-time highs, penetrating consumers’ pockets.
The situation is very worrying for the eurozone countries, given that nearly 50% of the region’s imports are denominated in dollars.
If the war in Ukraine ends soon – which is unlikely – the decline in the value of the euro may stop. As for the second alternative to curb this downturn, it lies in raising interest rates and adopting a more “aggressive” policy on the part of the European Central, but it also does not seem to be on the table at the present time.
The dollar’s strength is not only in the face of the euro, but has become evident throughout the year, and pressured most emerging countries’ currencies.
