The exchange rate of the European currency, the euro, fell against the US dollar in trading, on Tuesday, to the level of one dollar, for the first time since December 2002, before rising slightly, which raises questions about the reasons for this, and its repercussions on the US economy, as well as the countries of the Middle East.
“This means that there is a withdrawal of the dollar, and that investors want their assets to be denominated in the US dollar, which has proven its strength in the face of the Corona pandemic,” Maurice Kegler, professor of public policy at George Mason University, told Al-Hurra.
Kegler confirms that the rise in the value of the US dollar was driven by a significant increase in interest rates in the United States, after it remained during the Corona pandemic close to zero.
While the professor of economics at the American University in Cairo, Alia Al-Mahdi, in her interview with Al-Hurra website, attributes the rise in the value of the US dollar to this extent to the high interest rate that has occurred in the United States and is still happening.
And the chief market analyst at the Markets.com trading platform, Neil Wilson, considered that “the euro approached parity with the dollar for the first time since 2002, and it came after the European currency had been in a state of decline for months, but it plunged to a new low as fears escalated to cut off supplies. Russian gas to Europe this winter,” according to the newspaper.The Guardian“.
The European currency is receiving pressure due to fears of an economic recession in the eurozone, amid the ongoing energy crisis, and expectations of a rate hike by the European Central Bank (ECB) at its next meeting in July 2022.
In contrast, the dollar received support from expectations that the Federal Reserve will raise interest rates at a faster and stronger pace than its peers.
In his interview with Al-Hurra website, Kegler indicated that the dollar’s strength is due to the psychological state of investors, who see that the dollar has greater strength than the euro, especially with expectations that there will be a deeper recession in the European Union.
“The truth is something else.”
In his interview with Al-Hurra, Kegler expects investors to continue “escaping to safety towards the list of dollar-denominated assets, and thus the continued strength of the US dollar.”
The depreciation of the euro against the dollar will also “clearly disrupt European tourism, especially in the United States,” warned William de Vigelder, an economist at BNP Paribas, according to what was quoted by “AFP”.
Since tourists need more euros to pay the same amount in dollars, the bill for their stay in the United States will rise as well as in countries that have pegged their currency to the dollar (Qatar, Jordan, etc.).
On the other hand, American tourists, as well as Qataris and Jordanians, benefit from the currency exchange, while staying in the eurozone, as they can consume more with the same amount of dollars.
However, Al-Mahdi sees in her interview with Al-Hurra website that as much as what apparently happened appears to be a good development for the dollar, it is harmful to the United States and its foreign trade in particular, “because this means that the prices of American products will become the most expensive in the world, and this will increase the recession. the economy internally, and it will not improve the situation.”
She explained that “the higher the value of the dollar, the less the ability of the United States to export its products, and thus the stockpile increases, and this means a state of economic stagnation, and this may lead to higher unemployment rates.”
Kegler agrees with her, who says that “indeed, the problem is that the rise in the value of the dollar harms exporters and increases imports, and this means less economic activity.”
Economists see that recession risks are already increasing in the United States, as the Federal Reserve raises borrowing costs and consumers are depleting the savings they have accumulated during the pandemic, and in this regard, economic academic at Cornell University and the Brookings Institution, Eswar Prasad, says, “The strength of the dollar will certainly not benefit American exporters.”
On the other hand, the pound sterling also fell against the dollar, to $1.185 on Tuesday morning, the lowest level since March 2020, affected by political uncertainty and economic pessimism.
It comes as the race to choose a background for British Prime Minister Boris Johnson heated up, with several candidates promising tax cuts.
In this regard, Nelson said: “The pressure on the euro and the British pound reflects serious concerns about the economic outlook.”
He added, “With the high rate of inflation and the lack of a plan to control it, the currencies are declining.”
unsuccessful policy
Al-Mahdi argued that the US central bank raising the interest rate does not necessarily mean lower inflation as he wants, “this policy is not successful this time.”
She explained, “The rise in the value of the dollar and, consequently, the lack of exported products, and their presence on the shelves, does not mean that prices in the United States will decrease,” noting that the Central Bank raised the interest rate several times to reduce inflation and did not succeed in that, but rather increased inflation and reached about nine percent “.
“Inflation sometimes occurs for structural reasons and will only decrease when production expands and the market becomes saturated and fears subside,” she added.
‘Recession is coming’
Recession expectations come despite the fact that the US Central Bank agreed, on June 16, to raise the interest rate by 0.75 percent, the highest level since 1994, to slow economic growth, in order to reduce inflation rates that reached their highest levels in 40 years, amid warnings In the world of economics of the consequences of this decision on global markets.
With inflation reaching 8.6 percent in May, the highest since 1981, all prices in the United States have risen, and the Federal Reserve hopes that raising interest rates will slow inflation and ease price hikes.
And US Central Bank President Jerome Powell indicated that there may be another increase of 50 or 75 basis points in July.
In a research note, issued last week, the brokerage “Nomura” expects a weak recession in the United States, but a long one for about 15 months, starting in the last quarter of 2022, while it expects a deeper recession in the European Union and other countries such as Australia. Canada and South Korea.
Russia’s recent cut in natural gas supplies has sent prices sky high, and raised fears of a total cut that could force governments to ration energy for industry to spare homes, schools and hospitals, according to the website.fortinEconomic.
Economists at Berenberg Bank estimated that at current consumption rates, the added gas bill would be 220 billion euros ($224 billion) over 12 months, or 1.5% of annual economic output.
This war is a “material blow to Europe…it undermines the German growth model that relies on cheap Russian energy,” Robin Brooks, chief economist at the Institute for International Banking and Finance, tweeted this week.
The European slowdown may eventually give the European Central Bank less leeway to raise interest rates and adjust economic growth to tackle its own inflation problem.
The European Central Bank has said it will raise its key interest rate by a quarter point when it meets later this month, and possibly as much as half a point in September, as a weaker euro fuels inflationary pressures by making imports into Europe more expensive.
“decisive action”
Al-Mahdi points out that “the officials in the US Central Bank since the beginning of the year have been raising the interest rate and prices are also rising. Therefore, they must look for alternative ways to help reduce the inflation rate.”
Al-Mahdi points out that these alternatives may be in the form of “reducing tax rates, for example, and it may be a fiscal policy approach that may be useful in this case, rather than adopting monetary policies.”
The chief economist at Nomura, Rob Subbaraman, warned last week, during an interview with the network:CNBCThat “if central banks do not tighten monetary policy to reduce inflation now, the negative repercussions that will inflict on the economy will be significant, and inflation will be prolonged, and it will go to a long way.”
Great influence on the Middle East
As for the impact of the rise in the value of the US dollar on the Middle East markets, it is “a very harmful matter”, according to Al-Mahdi in her interview with Al-Hurra website, explaining that “this means that more investors will leave our country.”
“When the price of the dollar rises, as well as interest in the United States, the hot money exits in the Middle East markets, invests in the stock exchanges and heads to the United States, to take advantage of the interest rate,” she added.
Kegler points out that the rise in the value of the dollar harms developing countries, which borrow in order to buy basic resources for their citizens.
He said, “The rise in the value of the dollar and interest rates in the United States is hitting countries that have pegged their currency to the dollar and are borrowing from international money fluids hard, because this leads to a much greater cost of debt servicing, which means that credit becomes more expensive, as well as less foreign investment.”
Developing countries can benefit
To face the current crisis in developing countries and Middle Eastern markets, Al-Mahdi believes that “it is difficult to deal with it if the state’s economy depends on hot capital.”
But she stressed at the same time, that there is an opportunity for developing countries to benefit from the rise in the value of the dollar, “This means that your currency is currently relatively cheaper, and therefore you can open new markets for export.”
She explained, “Any developing country should now benefit from the rise in the price of the dollar, and export more, and this means that it will earn more, employ more workers, and reduce the unemployment rate. This is what China and Japan are doing, and they are two countries that are successful in dealing with the current economic crisis, and they did not raise interest rates.” .