The dollar reaches parity with the euro for the first time in 20 years | Economy

A person was crossing the street in February dressed in the single currency, near the headquarters of the German Bundesbank, in Frankfurt.
A person was crossing the street in February dressed in the single currency, near the headquarters of the German Bundesbank, in Frankfurt.DPA via Europa Press (DPA via Europa Press)

Governments, central banks, analysts and companies observe the movements of the graph almost hypnotized. The euro has been close to that symbolic moment for days when its value falls below the dollar, a step that, judging by the trend, seems irreversible. The single currency was exchanged for one dollar on Tuesday, thus reaching parity. It’s been 20 years, since 2002, that something like this hasn’t happened, but the different rate rise rates by the central banks, the war in Ukraine, which due to proximity and energy dependence is affecting Europe more than the US, and The fear of a recession, which usually drives safe-haven values ​​such as the dollar, is accelerating what until not so long ago seemed inconceivable.

The sorpasso it can still take days. The foreign exchange market has nothing to do with the cryptocurrency market, not even with the stock markets: its fluctuations are usually much smaller, but after a 15% drop in the euro against the dollar in the last twelve months, most experts points out that the question is not if it will happen, but when. The meeting of the European Central Bank next week seems key in its future: if the rate hike is only 25 basis points, the euro could continue to lose strength. But why are these changes important?

Tourism. It is the most basic effect, especially for those who plan to travel from the United States to Europe or vice versa. When a European traveler goes to the counter of an exchange house, they will give him fewer dollars for his euros, which means he will have less spending power. That can hurt the tourism industry in the US, the most visited country in the world. On the other hand, Americans crossing the Atlantic to one of the Nineteen euro countries will see their dollars stretch like chewing gum. And that can result in extra income for hotels, bars and restaurants, badly in need of good news after the pandemic debacle. European stores can also benefit: when in 2008 the euro was exchanged for 1.59 dollars, its historical maximum, it was not uncommon for many tourists to travel to the US with an almost empty suitcase to return with it full of bargains. Now the opposite can happen.

Trade. For decades, the devaluation of the currency was a basic monetary policy instrument to obtain competitive advantages with which to emerge from crises. The idea is simple: if your currency is worth less, your products are cheaper, and it is much easier to put them on the market, which revitalizes exports and boosts the economy. But that paradigm is ceasing to be an absolute truth: Germany, which supplies vehicles to much of the planet, suffered its first trade deficit in more than 30 years in May despite the weakness of the euro. The explanation lies in energy: Europe pays for gas and oil in dollars, so its rise in prices, together with the decline of the single currency, is triggering what is paid for imports, a transfer of money from energy buyers heading to the sellers that is unbalancing the trade balance towards the red.

Inflation. If, as is the case with energy, European companies pay for many of the raw materials they need in dollars, and this currency is more expensive, products will tend to reach consumers at a premium. It is the only way in which companies can maintain their margins, but also fuel for runaway inflation, double digits in Spain —10.2%—, and not far behind in the euro zone —8.6%.

Debt. Not only is the euro being a victim of that strength of the dollar: the pound sterling has dropped 16% in one year, and the yen 20% because the Bank of Japan maintains an ultra-flexible monetary policy unchanged because its inflation remains low. control —2.1% in May—. The currencies of some of the main emerging countries, such as Brazil and Mexico, are better resisting the blow, which is preventing turbulence from occurring in the area, which is highly exposed to debt issues in dollars and, therefore, vulnerable in the event of a for the dollar to gain ground against its currencies. ING experts explain this resistance in the rise in rates that they have undertaken. “Many emerging market central banks have been trying to resist local currency weakness through foreign exchange intervention.” Brazil has rates above 13%, and Mexico is close to 8%.

Will the euro continue to fall? The answer lies in the movements of central banks. The US Federal Reserve is being more aggressive than the ECB in raising rates, and making money more expensive pushes investors to concentrate more resources on that currency, which increases its value against other currencies. “The inflation situation is a global phenomenon; but, both due to its intensity and its causes, it presents differences between the different regions and, specifically, between the United States and Europe. For this reason, the Federal Reserve has initiated the normalization of its monetary policy before the European Central Bank and more decisively”, explains Francisco Uría, global head of Banking at KPMG.

Analysts at Allianz Global Investors believe that in the short term the dollar will continue to rise against the euro, “albeit at a slower pace.” And that as the months go by there could be a correction, although they add an objection to that thesis. “If the global economy weakens or enters a recession, the dollar will remain strongly supported overall.”

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