Wednesday , 29 May 2024
Home Global Economy Why the euro-dollar parity came about
Global Economy

Why the euro-dollar parity came about

The euro has not been this cheap for 20 years: For the first time since 2002, the European common currency has slipped to the one dollar mark. One euro cost only 1,000 dollars today at the low. Only in the early years of the common currency around the turn of the millennium did investors have to pay less dollars for one euro.

The weakness of the euro is also a sign of the strength of the dollar. Because not only against the euro, but also against other important currencies, the "greenback" had recently been able to make significant gains. The background is the significant tightening of US monetary policy, which makes investments in dollars comparatively more attractive.

Gas crisis weighs on the euro

However, it would not be enough to attribute the weakness of the euro solely to the strength of the dollar. Because the euro weakness is to a large extent home-made. It is the fear of a recession in Europe, triggered by the gas crisis, that is causing investors to shy away from investing in the euro. The possible declaration of a gas shortage by the Federal Network Agency is hanging over the German economy in particular like the sword of Damocles.

Yesterday, Monday, the maintenance-related shutdown of the gas pipeline Nord Stream 1 began. "Only after the end of the scheduled maintenance work on July 21 could it be clearer whether people and the economy in Germany have to prepare for a hard winter," emphasizes Jürgen Molnar, Capital Markets Strategist at RoboMarkets.

To what extent can the ECB take countermeasures?

The uncertainty about this is weighing on the euro. "With gas prices at dizzying heights, there is a growing danger that another inflationary shock will be added to the previous one," warns Ulrich Leuchtmann, Commerzbank's foreign exchange expert. As long as a gas crisis is looming, the foreign exchange expert can hardly make out any arguments for a significant euro recovery.

"In a gas crisis, the ECB could only do what is absolutely necessary to combat inflation. Just enough to prevent a spiral of euro depreciation and inflation acceleration. Some may even fear that it will not be able to do this itself."

Fed makes ECB look old

This tends to weaken the euro. Because while the ECB will only end its zero interest rate policy in July and then, for the reasons mentioned, will only continue to hike interest rates very slowly and cautiously, the monetary watchdogs in the USA have been stepping on the gas pedal for months.

At its June meeting, the Federal Reserve (Fed) raised interest rates more than they had since 1994. It decided to raise the rate by 75 basis points to the 1.50 to 1.75 percent range. According to the CME Group's Fed Watch Tool, most investors are expecting a large rate hike of 0.75 percentage points for the next Fed meeting in July. The interest rate gap to the euro should thus widen further in favor of the dollar.

Danger of imported inflation continues to grow

The low euro exchange rate is bad news for people in the euro area, as it is likely to cause "imported inflation" to continue to rise. After all, the recent drastic increase in inflation rates in the euro zone was largely due to the rapid rise in energy prices. Commodities like oil are traded in dollars. So if the euro falls against the dollar, you can buy less oil on the world markets for one euro.

But this is not only noticeable for car owners due to rising fuel prices at filling stations. Companies also have to buy oil more expensively. They then pass the rising production costs on to consumers and other companies in the form of price increases. This in turn drives the general rate of inflation.

Among the euro countries, Germany is particularly dependent on energy imports. With the euro at a 20-year low, the German economy's dependence on oil and gas is all the more fatal.

Leave a comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Articles

Global Economy

Spotlight on 2023: S&P 500 and the Significance of the 4400 Level

In our past exploration of the financial landscape of 2023, we delved...

Global Economy

AI and Data Analytics Drive Efficiency in Money Laundering Detection

BIS Innovation Hub Turns to Tech for Money Laundering Detection The BIS...

Global Economy

Russell 2000 Gains Momentum as Tech Stocks Outperform Value

Tech stocks have dominated the equity markets in recent months, surpassing value...

Global Economy

Crypto Exchange Bybit Announces Exit from Canadian Market Amid Regulatory Changes

Regulatory Shifts Prompt Bybit's Strategic Withdrawal from Canadian Crypto Market