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Global Economy

For the first time in 20 years: the euro falls to par with the US dollar

Fears of an energy crisis in Europe have pushed the euro to its lowest level against the dollar in 20 years. There are also fears of a global recession, accelerated inflation and the war in Ukraine. On Tuesday morning, the European currency briefly traded at par with the US dollar.

The shutdown of the Nord Stream 1 gas pipeline for maintenance began on Monday and Federal Minister of Economics Robert Habeck had expressed doubts as to whether gas would continue to come from Russia to Germany through the Nord Stream 1 Baltic Sea pipeline after the planned end of maintenance work on July 21.

The strong dollar also put the euro under pressure. New inflation data from the US is expected on Wednesday. The financial markets there are expecting a further rise in the inflation rate to 8.8 percent in June. This could result in a significant rate hike by the US Federal Reserve of 0.75 percentage points this month. In the euro zone, the turnaround in interest rates is not expected until July. This will boost the dollar and weigh on the euro.

LOSERS OF EURO WEAKNESS

Most commodities in the world are settled in US dollars. The fall of the euro against the US dollar alone has caused energy prices to rise by around 12 percent since the beginning of the year. Holidays in the USA and goods from there are also becoming more expensive: software subscriptions, technology such as iPhones or Macs, streaming subscriptions.

WINNERS OF EURO WEAKNESS

A weak euro, i.e. one that is cheaper in a foreign currency, means a boost in demand for export goods from the euro area – even if their prices come under pressure due to high raw material costs. The so-called southern countries of the euro zone in particular had longed for a "cheap euro" for years in order to make their export industries more competitive.

HOW COULD IT CONTINUE

US bank Goldman Sachs has lowered its growth forecasts for the euro zone for 2023 and in this context expects a possible decline in EUR/USD to 0.96.

"If the market were to price in our steep downside scenario, it could push EUR/USD down another 5%," Goldman Sachs said.

"Overall, risks remain on the downside over the next few weeks, particularly following the release of the US jobs report, which should keep the Fed on a tightening path and ease some fears of an imminent recession in the United States," the bank said .

Psychology always plays a role: On July 15, 2008, the euro passed the $1.60 mark – its all-time high. This peak was mainly explained by a decline in the dollar, which was burdened by the subprime crisis.

Sigrid Ulrich with dpa

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