Forex
The euro is at parity with the dollar. Why it happened and what it means for the economy
For the first time in 20 years, the euro has fallen to exactly one dollar. This was preceded by serious crisis phenomena in the European and American economies, and the change in exchange rates may be a consequence of a different response to the same crisis.
Why is the Euro falling?
At the moment, the euro is one step away from parity with the dollar – it costs about $1.0005 on world markets. The rate of 1 dollar to 1 euro has in fact already been reached.
The reasons for this are to be looked for from both sides – from the weakening of the euro and from the strengthening of the dollar:
- The dollar is rising on the back of the U.S. Federal Reserve’s tight monetary policy. The U.S. authorities are struggling with high inflation (it renews its highs every month), so the Fed is raising the interest rate at every next meeting. Higher interest rates make U.S. government securities more attractive to investors and this has a direct impact on the exchange rate. This is confirmed by the high value of the dollar index to other currencies (DXY);
- The euro has no reason to strengthen. The European Central Bank’s key rate policy remains soft – currently at minus 0.5%. EU countries are waiting for the ECB to take steps to raise the rate in order to fight inflation, and the rate may reach 0.75% by the end of the year. But so far this is not happening; inflation in the Eurozone reaches 8.6% (just like in the US), and the European economy is suffering from high energy prices.
Simply put, the reason for near parity is that the U.S. Fed is fighting inflation harder than the ECB. But the U.S. government debt service will become much more expensive for U.S. authorities, while European countries can still avoid unnecessary spending.
Among the reasons, experts call the current balance of foreign trade: EU countries have a negative (deficit of up to 1 trillion Euros) while the U.S. has a surplus.
What will be the consequences?
Among the obvious consequences of the weakening of the euro for the eurozone countries is the continued fall of the currency, a further increase in inflation, which will affect the standard of living in EU countries.
Experts predict the growth of tensions and economic problems in European countries:
- Today, achieved currency parity will not cause any significant consequences for the European economy. A fall below parity will signal the inevitable consequences of the energy crisis and the inevitable recession in the Eurozone. For U.S. companies, the weak euro means difficulties and problems with competitiveness in European markets.
- For European companies, a weak euro increases inflationary pressures through the rise in the cost of key imported raw materials for Eurozone companies. Theoretically, the weaker euro should be good for European exporters. At the same time, there are significant problems with energy supply in the Eurozone. This constrains the development of the investment potential of European industry for export. In addition, the weak euro reduces the attractiveness of assets denominated in European currency. As a result, investors will focus their investments in the United States.
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According to a report from the U.S. Treasury Department, the U.S. budget deficit in February was $262,434 billion compared to a $38.8 billion deficit in January. The Dow 30 also had problems.
Analysts at DailyFX suggested that the nation’s budget deficit for February was expected to be $256 billion. A year earlier, in February, the U.S. posted a budget deficit of $216,590 billion.
According to the GAO report, U.S. government spending rose 3.5 percent year over year last month to $524.548 billion, while revenue, in contrast, declined 9.5 percent to $262,114 billion.
Earlier, the U.S. edition of the Washington Post published an editorial stating that the new draft budget proposed by the Biden administration undermines U.S. national security and its ability to invest in the future, because it suggests a further growth of the U.S. national debt.
The WP editorial board noted that the new draft budget assumes a $2 trillion budget deficit, including due to the high cost of providing health insurance to the elderly of the baby boomer generation.
Earlier we reported that the EU has agreed to reduce energy consumption by 11.7% by 2030.
The European Union has agreed to reduce the bloc’s energy consumption by 11.7 percent by 2030, Reuters reported.
“This will mean a real change in favor of the climate and to the detriment of Putin,” the Danish Niels Fulsang, the European Parliament’s lead negotiator, told the agency.
Initially, in 2021, the EU proposed to reduce consumption by 9%, but in May 2022, against the background of events in Ukraine, increased the target to 13% to quickly abandon Russian energy, writes Forbes. The European Parliament considered it necessary to reduce consumption by 14%. The DAX Index also had problems.
Some EU countries have continued to insist on a 9% cut. An all-night negotiation between the EU and the European Parliament resulted in a compromise: the energy consumption of EU end-users, such as households and businesses, must be 11.7 percent lower than expected in 2030.
The agreement must pass final approval by the European Parliament and EU countries before it can become legally binding.
Earlier, we reported that consumers expect lower inflation in the eurozone, higher wages.
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