US dollars reach parity with euros for the first time in two decades
The two currencies reached parity on Wednesday morning, according to Bloomberg, after the euro suddenly lost value after the release of worrying US inflation data.
The euro has lost ground against the dollar since the beginning of the year, when it hovered close to 1.13 dollars, well outside the peak of almost 1.60 dollars in 2008. Live currency data reported by MarketWatch show that the euro slides only a few hundredths above. the dollar, while Bloomberg and Reuters reported that the euro briefly fell below one dollar in value.
Analysts say that the declining value of the euro reflects increasing risk aversion among investors, which flows into the dollar – considered a “safe haven” asset compared to other currencies – amid concerns about inflation, the war in Ukraine and fears of recession in many countries.
Currency markets took a hit on Wednesday morning when the US Bureau of Labor Statistics reported that US prices rose by 9.1 percent in June compared to a year ago, a new peak with inflation reaching 40-year highs.
The single currency of 19 EU member states has weakened during the month-long war in Ukraine, which has sent shock waves through global food and energy markets. The European Central Bank is also lagging behind peer-to-peer institutions such as the Federal Reserve in tackling rising inflation, which rose to 8.6 per cent last month – the highest level since the euro was introduced in 1999.
The Fed has aggressively raised interest rates to curb inflation problems, after announcing three rounds of increases this year alone, and has signaled that four more planned interest rate hikes are in the works. Although the European Central Bank is also expected to raise interest rates to bring inflation back to a target of 2 percent, it is likely to move at a slower pace: It has set a rate hike of 0.25 percent for July, while the Fed is general expected to go up by 0.75 percent, as it did in June.
The stronger dollar is good news for Americans considering a European vacation or buying goods abroad. Conversely, it has now become more expensive to travel and spend US dollars for those who earn wages in euros.
European companies that sell their goods abroad may find that the weaker currency makes exports more attractive, because the buyer’s currency will be more valuable compared to. American companies, on the other hand, may have a tougher time exporting their goods abroad.
But more importantly, some experts argue that a less potent euro signals lower economic growth for Europe. “It is becoming increasingly clear that the eurozone is heading into recession, even though financial conditions have tightened more than in the United States or Japan,” twitret Robin Brooks, Chief Economist at the Institute of International Finance.
After the war in Ukraine began, the Economist Intelligence Unit revised its 2022 growth forecast for the eurozone down from 4 percent to 2 percent. It forecasts a growth rate of 1.6 percent for 2023. And the euro’s weakness “reflects fears from investors of an impending recession in the eurozone,” said EIU Global Forecast Director Agathe Demarais.
The shares were choppy on Wednesday after the Inflation Report. The Dow Jones industrial average plunged nearly 450 points after the data was released, then reduced losses. Late in the morning, the blue-chip index was down 115 points, or 0.4 percent. The broader S&P 500 index fell 0.1 percent, while technology-heavy Nasdaq pushed up 0.3 percent. France’s CAC 40 lost 1.2 percent, while Germany’s DAX index lost 1.7 percent and the pan-European Stoxx 50 lost 1.5 percent.
