The Euro exchange rate has been falling for months, and has now reached the same level as the US Dollar.
Around a year ago, one euro cost $1.20. This then dropped down to $1.13, meeting the US dollar yesterday before dropping below $1 today.
The euro has experienced a drop in comparison to the US dollar because of a number of factors, including investor’s fears of an energy crisis and consequent recession, Russia’s invasion of Ukraine, and expectations of aggressive interest rates by the US Federal Reserve.
Analysts at Mizuho, a Japanese Bank, told the Guardian that the parity between the euro and the US dollar happened as “recession in the eurozone is priced in”.
Further, Chief Marketing Analyst at Markets.com, Neil Wilson said that the euro has “been on the slide for months but [the euro] took a fresh low as fears mount Russia could cut off gas supplies to Europe this winter.” Wilson went on to tell the Guardian that it was time for the European Central Bank to take decisive action.
There are worries that the drop in currency value will lead to worse inflation, and thus greatly impact the population’s already heightened cost-of-living crisis. This will further add to the burdens experienced by European households. It will make imports, which are mainly denominated in US dollars, more costly, and thus raise local prices of these goods. (Source)
“Typically, a weak currency may actually be seen as good news for exporters and export-heavy economies such as Germany,” explains Richard Allan of Capital Bean.
“This is because it can help to boost exports by making them cheaper in US dollar terms – meaning that the US dollar can purchase more at the same price to them. However, global supply chain frictions, sanctions and the war in Ukraine mean that this is far from the case.”
The parity comes at a point where the biggest single pipeline carrying Russian gas to Germany, known as the Nord Stream 1, shut for 10 days due to annual maintenance. With tensions heightened between Europe and Russia, there are some further concerns that gas supplies may not resume once the scheduled maintenance work is complete. This could bring on a recession, and has thus impacted investor’s decisions heavily, leading to a fall in the value of the euro.
The pound has also weakened against the dollar, falling to $1.185 yesterday – the lowest in over two years. This has been weighed down due to not only economic gloom, but also political uncertainty as the Prime Minister, Boris Johnson, announced his resignation from his post.
The last time that the Euro fell below US dollar parity was in July 2002 as large trade deficits, as well as accounting scandals on Wall Street caused the US dollar value to fall. The US dollar still remains however as the world’s dominant currency for both trade and central bank reserves. In the past 20 years, it has exceeded the currencies of its major trading partners, including the Euro.