A euro is worth less than a dollar for the first time in 20 years.  What does that mean?

A euro is worth less than a dollar for the first time in 20 years. What does that mean?

FILE - The Euro sculpture stands in front of the former European Central Bank in Frankfurt, Germany on July 13, 2022. The euro has dropped below par with the dollar, plunging to its lowest level in 20 years and ending a one-year rate. exchange rate with the US currency.  .(AP Photo/Michael Probst)

The euro fell to its lowest level against the dollar in 20 years, reinforcing a sense of foreboding in the 19 European countries that use it. (Michael Probst / Associated Press)

The euro fell below par with the dollar, dropping to its lowest level in 20 years and ending a one-to-one exchange rate with the US currency.

It’s a psychological barrier in markets, and the drop in values ​​underlines the sense of foreboding in the 19 European countries that use the euro as they grapple with an energy crisis caused by Russia’s war in Ukraine.

Here’s why the euro crash is happening and what impact it could have:

What does euro and dollar parity mean?

This means that European and American coins are worth the same amount. Although ever-changing, the euro has dropped just below $1 this week.

A currency’s exchange rate can be seen as a judgment on economic prospects, and Europe’s is fading. Expectations that the economy would see a recovery after turning the corner from the COVID-19 pandemic have been replaced by recession predictions.

More than anything, high energy prices and record inflation are to blame. Europe is much more dependent on Russian oil and natural gas than the United States to keep the industry running and generate electricity. Fears that the war in Ukraine will lead to a loss of Russian oil in global markets have driven up oil prices. And Russia has been cutting back on natural gas supplies to the European Union in what EU leaders describe as retaliation for sanctions on Russia and arms deliveries to Ukraine.

Energy prices pushed eurozone inflation to a record 8.9% in July, making everything from groceries to utility bills more expensive. They also raised fears that governments would need to ration natural gas to industries such as steel, glassmaking and agriculture if Russia scales back or completely shuts off gas taps.

The sense of doom increased when Russia reduced flows through the Nord Stream 1 pipeline to Germany to 20% of capacity and said it would close it for three days next week for “routine maintenance” at a compression station.

Natural gas prices in Europe’s TTF benchmark rose to record highs amid dwindling supply, fears of further cuts and strong demand.

“If you think the euro at par is cheap, think again,” tweeted Robin Brooks, chief economist at the banking trade group at the Institute of International Finance, on Monday.

“Global recession is coming,” he said in a second tweet.

When was the last time a euro was worth less than a dollar?

The euro was last valued below $1 on July 15, 2002.

The European currency hit an all-time high of $1.18 shortly after its launch on January 1, 1999, but then began a long decline, dropping to the $1 mark in February 2000 and hitting a record low of 82.3 cents in October 2000. It soared above par in 2002 as large trade deficits and Wall Street accounting scandals weighed on the dollar.

Then, as now, what appears to be a euro story is also, in many ways, a dollar story. That’s because the US dollar is still the world’s dominant currency for trade and central bank reserves. And the dollar has been hitting 20-year highs against the currencies of its main trading partners, not just the euro.

The dollar is also benefiting from its status as a haven for investors in times of uncertainty.

Why is the euro falling?

Many analysts attribute the euro’s fall to expectations of rapid interest rate hikes by the US Federal Reserve to fight inflation at nearly 40 years of high.

As the Fed raises interest rates, rates on interest-earning investments also tend to rise. If the Fed raises rates more than the European Central Bank, higher interest returns will attract money from euro investors to dollar-denominated investments. These investors will have to sell euros and buy dollars to buy these shares. This takes the euro down and the dollar up.

Last month, the European Central Bank raised interest rates for the first time in 11 years by half a percentage point higher than expected. Another increase is expected in September. But if the economy sinks into recession, that could stop the European Central Bank’s series of rate hikes.

Meanwhile, the US economy looks more robust, which means the Fed could continue to tighten up — and widen the rate gap.

Who wins?

American tourists in Europe will find cheaper hotel and restaurant bills and tickets. A weaker euro could make European exports more price competitive in the United States. The US and the EU are the main trading partners, so the exchange rate change will be noticed.

In the US, a stronger dollar means lower prices for imported goods – from cars and computers to toys and medical equipment – ​​which can help moderate inflation.

Who loses?

American companies that do a lot of business in Europe will see revenue from those businesses decrease when and if they bring those earnings back to the United States. If the euro earnings stay in Europe to cover the costs there, the exchange rate will become less of an issue.

One of the main concerns of the United States is that a stronger dollar will make U.S.-made goods more expensive in foreign markets, widening the trade deficit and reducing economic output, while giving foreign goods a price advantage in the United States. United.

A weaker euro could be a headache for the European Central Bank because it could mean higher prices for imported goods, particularly oil, which is priced in dollars. The ECB is already being pulled in different directions: it is raising interest rates, the typical remedy for inflation, but higher rates can also slow economic growth.

This story originally appeared in the Los Angeles Times.

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