Euro-Dollar Parity 1:1- Europe takes Steps Backwards Compared to the US

Each currency reflects the reality in the economy and is a tool of a specific economic policy. Reflecting at the same time, the general situation of the period, it is a matter of time, as everything shows, for the parity of the euro against the dollar to reach the absolute one-to-one and to fall below the specific limit.

It is the first time since 2002 that something like this will happen, causing reasonable questions regarding the causes, but also concerns about the consequences that this development can have.

Why is the euro falling?

The war in Ukraine which is about to complete five months, the threat it represents to Europe and its future (clearly greater compared to the US), as well as the differences in the monetary policy of the ECB and the Fed are seen as the main causes for the continuous depreciation of the euro.

It is worth noting that the American central bank has been the first to start aggressive interest rate hikes, having already announced three within 2022, while planning at least four more as part of the strategy it has developed to tame inflation. The ECB, on the other hand, is proceeding along the same path but at a much slower pace.

So, combined with Trust Economics CEO Thanos Chonthrogiannis’ assessment that “it is becoming increasingly clear that the Eurozone is heading for a recession and stagflation”, the dollar is being viewed even more as a “safe haven” while also becoming more attractive to investors.

Is 1:1 parity important and why?

The crisis facing the euro today does not have “existential” characteristics, while the eurozone has faced other important ones in the past and may do the same. And this, despite the fact that the war and the combination of all other crises creates a rather unprecedented situation.

The exchange rate between the euro and the dollar is the most important in the world, the consequences are serious when it fluctuates significantly. For example, businesses are forced to spend more to hedge against risks in the foreign exchange market, while their borrowing is clearly affected.

How far can the euro go?

No safe predictions can be made at this point, especially since the rate against the US currency is shaped by a combination of several factors, several of which are unpredictable. A more aggressive policy from Frankfurt cannot change the situation either, at least to some extent.

Some analysts estimate that the exchange rate could fall by another 10% or so, to 90 cents on the dollar to the euro. Deutsche Bank analysts, for their part, believe that in the worst-case scenario – which would refer to the most extreme situations created since the end of the Bretton Woods system that firmly linked the value of most currencies to the dollar – the retreat it could reach up to 0.97-0.95 dollars per euro.

What are the immediate and visible consequences?

Eurostat data show that almost half of goods imported into the eurozone are priced in dollars, compared to less than 40% in euros. “Energy” in particular, i.e. oil and natural gas, has traditionally been paid for in dollars – so as both the prices of the two goods and the dollar’s exchange rate have skyrocketed, more and more euros are required from budgets to meet needs.

The continued weakening of the euro complicates and complicates the ECB’s efforts to tame inflation. At the same time, while import-reliant businesses are at a clear disadvantage, export-oriented ones hope to benefit as their products become more competitive in several international markets. This, however, can be anything but a given. Because any export gains could be wiped out by rising inflation in the 19 eurozone member states. This marks Germany’s first monthly trade deficit since 1991.

What can the ECB do?

Worst of all, however, is that the “uneven growth” and contradictions within the euro zone do not allow the central bank and Christine Lagarde to set an aggressive policy and pursue it as a single entity.

Italy’s needs, for example, like France’s to a large extent, are different from those of Germany and the Netherlands. And this is also reflected in the decisions taken and will be taken regarding interest rates and government bond purchase packages.

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Trust Economics is a specialized independent economic research, analysis and consultancy business. Our team provides ingenious analysis in the macro & micro economic field, in the field of financial market, regional and sectoral analysis equally, forecasts, consultancy, specialized studies-research/projects from its headquarters in Athens, Greece.

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