The euro has since hit heavy against the US currency Russia’s invasion of UkraineThe European currency has fallen to a 20-year low as rising gas prices and uncertainty over Russia’s energy supply have raised fears of a recession in the eurozone.
The common European currency traded as low as about $ 1,0007 on Tuesday (July 12, 2022), a rapid drop from $ 1.15 before Russia started the war in Ukraine. The sharp fall brought the euro close to parity against the US dollar for the first time since late 2002.
Why is the euro falling?
The decline in the economic outlook in the euro area amid a rise gas prices And fears that Russia will cut off energy supplies will lead to a drop in the single currency. The huge dependence of large economies such as Germany and Italy on Russian gas has left investors on edge, with economists predicting a faster and more painful recession in the eurozone than in the United States.
Another explanation is the difference in interest rate levels in the US and the Eurozone. While the US Federal Reserve aggressively raised interest rates to limit rates inflationresist European Central Bank Draw up any actual increases.
“The interest rate in the US is expected to rise to 3% compared to 1% in Europe. So, the money will go to the place with the highest return,” said Karsten Bryssky, CFO of ING Banking Group in an interview with DW.
The US dollar also benefits from its attractiveness as a safe haven, amid the uncertainty associated with global economies. Investors are comfortable with the relative safety of the dollar, which is currently less exposed to some major global risks.
Equality between the euro and the dollar
Parity basically means that one US dollar now buys one Euro, which is nothing more than a psychological threshold for market participants known for their penchant for integers. “Financial markets always like to find some sort of symbolic meaning,” Briceski explains.
For his part, researcher in the field of financial speculation Viraj Patel believes that the level of parity between euro And the dollar could be a point at which financial speculators conclude the way the European currency is going.
“We have recently begun to see investors betting a bigger drop in the euro to below parity. But you can just imagine that more investors will start buying the euro as we approach such a low,” says Viraj, an expert at Vanda Research .
How a weak euro affects the consumer
A fall in the euro will contribute to the burden on European households and companies already suffering from record high inflation. A weaker euro will make imports, which are mostly in dollars, more expensive. When these imported materials are raw materials or intermediate goods, their higher cost can further increase domestic prices. “There will be a greater burden on the European economy due to a weaker euro,” Battle said.
In normal times, a weak currency is seen as a good sign for exporters and export-heavy economies like Germany, because a lower currency will boost exports as it gets cheaper. However, these are not normal times, due to disruptions in the global supply chain, sanctions andThe war in Ukraine.
“In the current situation with the geopolitical tensions we are seeing, I think the benefits of a weaker currency are few compared to the cons and cons,” Briceski said.
For American travelers going to Europe this summer, a weaker euro is a blessing. For example, they will be able to exchange $ 1,000 for € 1,000 compared to less than € 900 in February. For companies importing European goods, the goods will be cheaper at the expense of the dollar.
Are there other lows?
Bets are currently rising that the Euro will continue to fall against the Dollar in the coming days as the energy crisis in Europe worsens.
According to the expert, Patel, “the euro is currently trading as if an expected crisis in Europe will take place soon, so we may hear more bad news in rates. Euro exchangeto be less than a dollar.
Financial experts at Nomura International Holdings expect the euro to fall to the $ 0.95 mark. George Zaravelos, head of foreign exchange at Deutsche Bank, has similar expectations. “A move to $ 0.95 to $ 0.97 will match the exchange rate limits,” he wrote in a July 6 note to clients.
What does a weak euro mean for the European Bank?
A weak euro and inflation will contribute to the challenges facing the European Central Bank, which is already facing significant financial challenges due to its slowdown in the fight against inflation. To make matters worse for the central bank, which has powers to curb inflation, the euro has weakened not only against the dollar, but also against other currencies such as the Swiss franc and the Japanese yen.
“The fall in euro exchange rates could increase the extent of euro weakness against other currencies, and thus become a bigger inflation problem for the European Central Bank,” Battle said.
plan European Central Bank He will raise interest rates by 25 basis points next week, his first increase in more than 10 years. “The weakness of the euro supports the view of raising interest rates more aggressively,” Brzeski said.
However, some experts say that the economic downturn will put the European Central Bank in a predicament, which will prevent it from making a significant rate hike, which will keep the euro’s rates against the dollar low.
Ashutosh Bindi / Alaa Gomaa