Banner1
The euro reaches its lowest level in 20 years against the dollar: what are the consequences of the historical parity of the currencies - Fintech Morning

The euro reaches its lowest level in 20 years against the dollar: what are the consequences of the historical parity of the currencies

banner2

The European currency reached its lowest level in 20 years, touching parity with the dollar.

The two currencies came within a penny of reaching exactly the same value, when the euro hovered around $1,007 on Monday, down nearly 15% since the start of the year.

This comes as fears of an economic recession in Europe grow in the markets , in a context of high inflation and growing uncertainty about the continuity of Russian gas supplies.

Gone are the years when the euro was so strong (1.6 times the dollar during the 2008 global financial crisis) that many Europeans vacationed in the United States for cheap hotels and food, returning home with suitcases. full of electronics and clothes.

But now the situation is completely different, with Europe suffering the economic consequences of the war in Ukraine and the decision of the European Central Bank to maintain interest rates.

Why is the euro sinking?

The euro’s depreciation comes amid an energy crisis in Europe triggered by the Russian invasion of Ukraine.

There is concern about the possibility that this crisis will cause a recession with unforeseen consequences, a shadow that intensified on Monday due to the reduction in Russian gas supply and the concern that inflation will continue to rise.

Gas pipeline between Bulgaria and Greece

Russian energy giant Gazprom has started 10 days of maintenance on its Nord Stream 1 pipeline, with Germany and other European countries anxiously watching whether the gas will return after this operation.

Russia could use the opportunity to close the valves.

“There is a lot of fear about what could happen in the energy field with the war. We’ll see if we continue to receive gas from Russia,” says Juan Carlos Martínez, professor of Economics at IE University.

To this conflict is added the blow that the currency has received because interest rates are rising much faster in the United States and that attracts capital to the world’s largest economy.

“The most important cause of the fall of the euro is the different speed in the monetary policy of the United States Federal Reserve and the European Central Bank,” argues Martínez in dialogue with BBC Mundo.

Hand with euros.

For investors, US Treasury bond yields are higher than those of European debt, making them prefer the dollar to the euro.

From that perspective the European Central Bank is in a difficult position, trying to rein in inflation and, at the same time, cushioning a slowing economy.

“The euro zone has not yet begun to raise interest rates. It will foreseeably do so at its meeting at the end of July, but it will do so more slowly,” added Martínez.

banner4

What are the consequences?

With inflation in the euro zone at its highest level since records began (8.6%), the depreciation of the euro increases the cost of living by making imports more expensive .

At other times in history, a weaker currency is not necessarily bad news because governments use it as a way to stimulate economic growth as exports become more competitive.

Now, however, that is not the case.

Consumers in the German market

“Every time the dollar continues to appreciate, it costs us more in euros to buy a barrel of oil. That is the big problem we see now,” explains the economist.

That is why a weak euro has contributed to the fact that fuels have surpassed all-time highs, piercing the pockets of consumers.

The situation is worrying for the countries of the region, considering that nearly 50% of imports from the euro zone are denominated in dollars.

Gas station in Athens, Greece.

If the war in Ukraine were to end soon, which experts consider unlikely, the depreciation of the euro could stop.

The second alternative to stop the devaluation is to raise interest rates in the euro zone.

“A more aggressive policy from the European Central Bank would be necessary, something that at the moment does not seem to be on the table,” says Martínez.

Latin America

In the case of Latin America, the parity between the euro and the dollar “does not have a direct impact on the region,” Elijah Oliveros-Rosen, senior economist at the Latin America Global Economics & Research division, tells BBC Mundo.

What this situation reflects, he adds, is that there is an appreciation of the dollar at a general level.

Descending arrow with euro bills.

” The strength of the dollar is not only against the euro, but also against most of the currencies of emerging countries , including Latin America.”

In fact, Argentina, Chile and Colombia are the three countries that have suffered the worst devaluations of their currencies so far this year against the dollar.

Link: https://www.bbc.com/mundo/noticias-62129903

Author:

  • Cecilia Barria
  • BBC News World
Author avatar
Edinson Love
https://fintechmorning.com

Post a comment

Your email address will not be published.