Euro and dollar: disturbing parity | Economy

A one dollar bill.
A one dollar bill.Reuters

This Tuesday, as had been feared for some time, the euro reached parity with the US dollar. No one dares right now to speculate what will happen to the value of the world’s two main currencies in the coming days and weeks, but we must remember that in the last year the euro has depreciated against the dollar by more than 15.6 %. It is an intense trend and full of meaning. There are many factors that explain this evolution. Undoubtedly, the Eurozone economy is much more exposed to the war in Ukraine and the consequences of the sanctions against Russia, particularly what is happening around that country’s gas. However, in addition to a geopolitical element of such importance, there are financial and economic reasons that have made the euro lose value.

Interest rates —of course, the official ones, the first ones— continue to be lower in Europe than in the United States, which is why assets denominated in dollars are in greater demand, since they currently offer higher returns. Capital flows into that currency, making it more expensive relative to the rest, including the euro. A conjunctural issue that logically affects are the greatest current doubts about what the European Central Bank will be able to do in terms of inflation control and at the same time avoid financial fragmentation in the euro zone, for which the implementation of a new powerful and credible mechanism buying debt seems more necessary than ever. I would almost dare say urgent. Furthermore, it cannot be forgotten that in the midst of so much uncertainty, the dollar has become a refuge currency.

The European economy has been less competitive than the US for some time. That had not been reflected in the relative value of the euro and the dollar, but with the arrival of the turbulence, everything weighs. Even more so, with the enormous vulnerability of the Old Continent in terms of energy. The economic slowdown —the Eurogroup has announced that it will once again worsen its forecasts for both GDP growth and inflation— could end in recession in the countries most dependent on Russian gas. Uncertainty and rising rates are reducing the growth potential of the economies. The great risk in Europe —especially in Germany, the economic engine of the continent— is in the cut off of Russian gas supply. This threat already generates negative effects, as reflected in the indicator of the German analysis institute ZEW published this Tuesday, which shows a low confidence of investors for the Teutonic economy.

Many European exporters may rejoice at the cheaper euro, which makes their goods and services more competitive. However, it will not reach everyone: expectations for energy-intensive and export-oriented economic sectors are falling sharply. Fuel imports —which are bought in dollars— will become more expensive. As if what we already had was not enough, this parity between the euro and the dollar is added to the list of notable economic concerns for the coming quarters.

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