What's the impact of the euro parity with the dollar? | AP News

  

Category:  News & Politics

Via:  perrie-halpern  •  3 weeks ago  •  23 comments

By:   AP NEWS

What's the impact of the euro parity with the dollar? | AP News
The euro is hovering close to parity with the dollar, falling to its lowest level in 20 years. Here's why the euro's slide is happening and what impact it could have.

S E E D E D   C O N T E N T



The euro has hit parity with the dollar, falling to its lowest level in 20 years and even skirting just below a one-to-one exchange rate with the U.S. currency at times this week.

It's a psychological barrier in the markets. But psychology is important, and the euro's slide underlines the foreboding in the 19 European countries using the currency as they struggle with an energy crisis caused by Russia's war in Ukraine.

Here's why the euro's slide is happening and what impact it could have:

WHAT DOES EURO AND DOLLAR PARITY MEAN?

It means the European and American currencies are worth the same amount.

A currency's exchange rate can be a verdict on economic prospects, and Europe's have been fading. Expectations that the economy would see a rebound after turning the corner from the COVID-19 pandemic are being replaced by recession predictions.

More than anything, higher energy prices and record inflation are to blame. Europe is far more dependent on Russian oil and natural gas than the U.S. to keep industry humming and generate electricity. Fears that the war in Ukraine will lead to a loss of Russian oil on global markets have pushed oil prices higher. And Russia has been cutting back natural gas supplies to the European Union, which EU leaders described as retaliation for sanctions and weapons deliveries to Ukraine.

Energy prices have driven euro-area inflation to a record 8.6% in June, making everything from groceries to utility bills more expensive. They also have raised fears about governments rationing natural gas to industries like steel, glassmaking and agriculture if Russia further reduces or shuts off the gas taps completely.

The sense of doom increased when the major Nord Stream 1 pipeline from Russia to Germany closed Monday for scheduled maintenance, raising fears the Kremlin won't restart deliveries this month.

"What's the fall in the Euro saying? It's becoming increasingly clear that the Euro zone is heading into recession," Robin Brooks, chief economist at the Institute of International Finance banking trade group, tweeted Tuesday.

WHEN WAS THE LAST TIME THE EURO WAS EQUAL TO THE DOLLAR?

The euro hasn't been valued below $1 since July 15, 2002. While constantly changing, it has dropped just under a $1 at times this week.

The European currency hit its all-time high of $1.18 shortly after its launch on Jan. 1, 1999, but then began a long slide, falling through the $1 mark in February 2000 and hitting a record low of 82.30 cents in October 2000. It rose above parity in 2002 as large trade deficits and accounting scandals on Wall Street weighed on the dollar.

Then as now, what appears to be a euro story is also in many ways a dollar story. That's because the U.S. dollar is still the world's dominant currency for trade and central bank reserves. And the dollar has been hitting 20-year highs against the currencies of its major trading partners, not just the euro.

The dollar is also benefiting from its status as a safe haven for investors in times of uncertainty.

WHY IS THE EURO FALLING?

Many analysts attribute the euro's slide to expectations for rapid interest rate increases by the U.S. Federal Reserve to combat 40-year highs in inflation, which hit an annual 9.1% on Wednesday.

As the Fed raises interest rates, the rates on interest-bearing investments tend to rise as well. If the Fed raises rates more than the European Central Bank, higher interest returns will attract investor money from euros into dollar-denominated investments. Those investors will have to sell euros and buy dollars to buy those holdings. That drives the euro down and the dollar up.

The ECB has announced it will raise interest rates next week and add another increase in September. But if the economy sinks into recession, that could halt the ECB's series of rate increases. Meanwhile, the U.S. economy looks more robust, meaning the Fed could go on tightening — and widen the rate gap.

WHO WINS?

American tourists in Europe will find cheaper hotel and restaurant bills and admission tickets. The weaker euro could make European export goods more competitive on price in the United States. The U.S. and the EU are major trade partners, so the exchange rate shift will get noticed.

In the U.S., a stronger dollar means lower prices on imported goods — from cars and computers to toys and medical equipment — which could help moderate inflation.

"The parity makes it easy for us, and a lot more money goes a lot further now, so we can do a lot more on our trip," said John Muldoon, who was visiting Rome this week from Delaware.

Olivia Navarret, another Rome tourist from Pennsylvania, said the exchange rate meant a shirt she bought was less expensive.

"It's cheaper to come here and buy stuff," she said. "So it's better to come here, I guess, and spend money here than spend money in the U.S."

WHO LOSES?

American companies that do a lot of business in Europe will see the revenue from those businesses shrink when and if they bring those earnings back to the U.S. If euro earnings remain in Europe to cover costs there, the exchange rate becomes less of an issue.

A key worry for the U.S. is that a stronger dollar makes U.S.-made products more expensive in overseas markets, widening the trade deficit and reducing economic output, while giving foreign products a price edge in the United States.

A weaker euro can be a headache for the European Central Bank because it can mean higher prices for imported goods, particularly oil, which is priced in dollars. The ECB is already being pulled in different directions: It is set to raise interest rates, the typical medicine for inflation, but higher rates also can slow economic growth.

All contents © copyright 2022 The Associated Press. All rights reserved.


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Revillug
Freshman Guide
1  Revillug    3 weeks ago

European exports are now more affordable, so it's not all bad news for Europe.

The European central bank has been even slower than the US Fed to raise interest rates. This is because just like us they don't want to trigger a recession especially if it won't fix the inflation problem.

The problem? Too much currency chasing too few goods. 

That brings us to the supply chain and Russia's impact on the global food supply and oil supply.

Fuck Russia.

If only central banks could have world leaders assassinated.

(Besides Kennedy, that is.)

 
 
 
Revillug
Freshman Guide
1.1  Revillug  replied to  Revillug @1    3 weeks ago
If only central banks could have world leaders

"...deposed."

I think deposed would have been a better choice of word for the above comment.

 
 
 
Nerm_L
PhD Principal
2  Nerm_L    3 weeks ago

Inflation neutralizes any advantage in currency exchange rates.  The value of the euro compared to the dollar falling by 10 pct appears to provide an advantage.  But if prices, in euros, increase by 10 pct then it will require the same number of dollars to buy the same goods and services.

Exchange rates provide a benefit to the financial sector since that sector only trades in currencies.  The financial sector is not consuming goods and services so is unaffected by inflationary price increases. 

The financial sector also obtains a short-term advantage from inflation when central banks raise interest rates which increases the profitability of lending.  That advantage is only short-term because lenders tend to sell the loans at a discount; lenders do not hold the loans for the life of the loan.

Good news for the financial sector doesn't translate into good news for consumers.  Inflation bites consumers at both ends.  Currency exchange coupled with inflation is only a way for the rich to become richer.

 
 
 
Perrie Halpern R.A.
Professor Principal
2.1  seeder  Perrie Halpern R.A.  replied to  Nerm_L @2    3 weeks ago

Idk Nerm. Just came back from Italy, and I have to say that the exchange rate meant that it cost us a lot less. 

Cheaper European products can't be a bad thing.

 
 
 
Drinker of the Wry
Freshman Principal
2.1.1  Drinker of the Wry  replied to  Perrie Halpern R.A. @2.1    3 weeks ago
Cheaper European products can't be a bad thing.

Not for me, but I’m not an American manufacturer.

 
 
 
Nerm_L
PhD Principal
2.1.2  Nerm_L  replied to  Perrie Halpern R.A. @2.1    3 weeks ago
Idk Nerm. Just came back from Italy, and I have to say that the exchange rate meant that it cost us a lot less.  Cheaper European products can't be a bad thing.

If the exchange rate doesn't change and inflation causes price increases then it would require more euros and dollars to pay the higher prices, right? 

If the value of the euro falls compared the dollar then Europeans would be paying more euros (because of the higher prices) but Americans wouldn't pay more dollars for the same goods and services.  So, the exchange rate has cancelled out the price increases for Americans.

So, the overall effect is that Europeans are paying more euros for goods and services while Americans are paying the same amount of dollars for those same goods and services.  The combination of falling euro value and inflation in Europe has cancelled each other for Americans.  Americans aren't paying less dollars than before; Americans are paying the same.  The European products are not more expensive in dollars but they aren't cheaper in dollars, either. 

 
 
 
mocowgirl
Professor Quiet
3  mocowgirl    3 weeks ago
A key worry for the U.S. is that a stronger dollar makes U.S.-made products more expensive in overseas markets, widening the trade deficit and reducing economic output, while giving foreign products a price edge in the United States.

If US oil becomes unaffordable to European consumers, what will happen to the US led Russian oil embargo?

Europe Now Imports More U.S. Oil Than Asia | OilPrice.com

Europe has overtaken Asia as the biggest buyer of U.S. crude oil, importing 213.1 million barrels over the first five months of the year, while Asia imported 191.1 million barrels, Bloomberg   reported , citing Census Bureau data.

This is the first time in six years that Europe has been a bigger buyer of U.S. crude than Asia.

The change resulted from the redirection of oil flows following Russia’s invasion of Ukraine and the sanctions that the European Union and the United States imposed on Moscow in response.

However, U.S. oil might not be enough to fill the gap left by Russian oil once the European Union embargo on the latter takes effect later this year. According to one energy analyst, this means the EU would need to step up imports from Asia.

Jonathan Leitch from Turner Mason & Company   believes   that the shortfall in oil imports from Russia to the EU could be more than 700,000 bpd, and the EU would need to find new sources to plug the gap.

China and India could be among these sources, Leitch told UBS in a recent call, but both countries are putting limits on exports as they seek to lower domestic oil and fuel prices. Related: Could Argentina’s Dead Cow Shale Patch Help Solve The Energy Crisis?

What the suggestion means, however, is that neither the United States nor the Middle Eastern OPEC producers could step in fast enough to fill the gap.

According to Christopher Haines from Energy Aspects, who spoke to Bloomberg, the substantial rate of U.S. oil imports into Europe will remain unchanged over the short term as the EU reduces its reliance on Russian oil.

The problem, both for Europe and Asia, is that U.S. production of crude is not growing fast enough to respond to demand in the two regions. This, coupled with doubts about OPEC’s ability to boost production, suggests prices are likely to remain elevated.

 
 
 
mocowgirl
Professor Quiet
3.1  mocowgirl  replied to  mocowgirl @3    3 weeks ago

In my previous comment there is a link to an article about Argentina becoming a player on the world energy market, but I googled for info on Venezuela because it has some of the largest known oil reserves and I was curious why Venezuela was not filling a large part of the void caused by the embargo on Russian products.  I had forgotten that the US government had led embargoes against Venezuela oil exports.

If the world oil prices fail to stabilize, and shortages caused by embargo against Russia are not covered, then how many people are going to be able to pay their bills in the near future, and how many people are going to freeze to death because they can't afford to heat their homes this winter?

There is a lot more at stake than being able to buy European luxury products at cheaper rates.

Resumption of deliveries to Europe boosts Venezuela oil exports -data | Reuters

July 5 (Reuters) - The first Venezuelan crude cargoes sent to Europe in two years helped lift the OPEC nation's oil exports by 61% last month after a series of setbacks earlier in the year, tanker tracking data and documents from state-run PDVSA showed.

Italy's Eni   (ENI.MI)   and Spain Repsol   (REP.MC)   started taking Venezuelan crude after receiving a green light from the U.S. State Department. The U.S. decision, a move to help Europe compensate for the loss of Russian oil following its invasion of Ukraine, also marks a step toward better relations between Caracas and Washington.

The oil-for-debt exchanges, viewed by analysts as a sign of the easing of Washington's sanctions on the South American nation, happened as U.S. officials visited Caracas to discuss the release of jailed Americans. That visit failed to secure their release.   read more

In June, PDVSA and its joint ventures shipped an average of 630,500 barrels per day (bpd) of crude and fuel, a 61%-increase from the previous month and similar to the same month last year, according to the documents and Refinitiv data.

Venezuela's May exports had plummeted due to changes imposed by PDVSA requiring prepayments for cargoes. The changes came after some buyers reneged on payments.

Almost two-thirds of total exports last month went to Asia. Cuba, which is struggling to meet domestic demand due to unaffordable fuel prices, received some 66,400 bpd of crude, fuel oil, gasoil and gasoline from its ally, the data showed.

Still, PDVSA continued struggling to manage heavy and diluted crude inventories, which were near full capacity and forced six unplanned disruptions at one of its blending stations last month, according to one of the documents viewed by Reuters.

OPEC Secretary General Mohammad Barkindo said on Tuesday that allowing extra supplies from Iran and Venezuela to flow to markets could ease a global supply shortage.

A similar call was made by the French government last week, which said the international community should explore all options to alleviate a Russian squeeze of energy supplies.   read more
 
 
 
mocowgirl
Professor Quiet
3.1.1  mocowgirl  replied to  mocowgirl @3.1    3 weeks ago

An article that gives more information on the relations between the US government and Venezuela.

U.S. delegation fails to secure release of Americans in Venezuela visit | Reuters

WASHINGTON/CARACAS, June 30 (Reuters) - A U.S. delegation led by President Joe Biden's chief hostage negotiator ended a visit to Venezuela on Thursday after failing to secure the release of any of the Americans detained there, U.S. officials said.

Though the visit did not lead to releases, it was a fresh sign of tenuous re-engagement after years of hostilities between the United States and OPEC member Venezuela and comes as Russia's war against Ukraine has hit global oil supplies.

Talks this week with Maduro's Socialist government did not include Venezuela's oil sector, under U.S. sanctions since 2019, according to the sources.

The delegation did meet opposition leader Juan Guaido. Washington recognizes him as Venezuela's legitimate interim president, having rejected Maduro's 2018 re-election as a sham, but the Socialist leader remains in power, backed by the military as well as Russia, Cuba, China and Iran.
 
 
 
Ender
Professor Principal
3.1.2  Ender  replied to  mocowgirl @3.1.1    3 weeks ago

A strange thought. I always wondered what will happen when oil is pumped out and leaves a cavern below. A cave in eventually?

 
 
 
mocowgirl
Professor Quiet
3.1.3  mocowgirl  replied to  Ender @3.1.2    3 weeks ago
I always wondered what will happen when oil is pumped out and leaves a cavern below.

I am wondering how many working-class people are not going to survive the power plays by the world's robber barons.

 
 
 
Drinker of the Wry
Freshman Principal
3.1.4  Drinker of the Wry  replied to  Ender @3.1.2    3 weeks ago

Depending on the depth and surrounding geology, cement will be poured into the retired well.

 
 
 
Ender
Professor Principal
3.1.5  Ender  replied to  Drinker of the Wry @3.1.4    3 weeks ago

I thought they only did that to cap the well.

 
 
 
Drinker of the Wry
Freshman Principal
3.1.6  Drinker of the Wry  replied to  Ender @3.1.5    3 weeks ago

I don’t know but I think the entire shaft is filled so it costs more to plug a deep well or one that was horizontally drilled.

 
 
 
mocowgirl
Professor Quiet
3.1.7  mocowgirl  replied to  Drinker of the Wry @3.1.6    3 weeks ago
don’t know but I think the entire shaft is filled

Nope.

The wells are fracked with water and a few chemicals.  The water is too contaminated to bring back to the surface and is left in the well.  This is destabilizing the areas that are drilled and fracked.  It is very hazardous to our environment and could be even more hazardous doing offshore drilling.

I just did a cursory overview of the material in the following article, but it seems to be in agreement with the many articles that I have read about fracking over the past decade.

Fracking 101 | NRDC It took some time for hydraulic fracturing—or “fracking”—to become as widespread as it is today. Although American entrepreneurs have known for more than a century how to crack open rocks deep below the earth’s surface to access trapped fossil fuel deposits, fracking gained a serious foothold in the nation’s energy market only in the past two decades. During this time, a fracking boom has helped the United States become the global leader in natural gas and crude oil production. But the extraction of  dirty fossil fuels  by any means comes at a cost, and the  risks  associated with fracking to the environment, our health, and the earth’s climate are serious. Here’s a look at the fracking boom and the perils it presents.
 
 
 
mocowgirl
Professor Quiet
3.1.8  mocowgirl  replied to  Drinker of the Wry @3.1.6    3 weeks ago
I don’t know but I think the entire shaft is filled

more info on fracking wells.

U.S. Shale Drillers Begin Re-Fracking Existing Wells | OilPrice.com

Oil well re-fracking is on the rise in the United States as shale producers seek to boost production without making significant investments in new wells, Reuters has  reported .

According to the report, re-fracking of existing shale wells can cost up to 40 percent less than drilling a new well. It can also double or triple the output of an existing well, one fracking industry executive told Reuters.

Re-fracking could also help U.S. shale drillers boost their cash flow further, which would make their shareholders even happier than higher dividends.

According to a recent   report   by Saudi bank Al Rahji Capital, cash per well for U.S. shale producers rose to $34 per barrel in the first quarter of this year, from $23 per barrel in the last quarter of 2021.

This is still much lower than the $51 per barrel that shale drillers got in the first quarter of 2020, the report noted, but added that it is still “providing enough cushion to boost the production levels amid higher oil prices.”

U.S. crude oil prices have gained some 40 percent over the past 12 months, but domestic oil production remains about a million barrels daily below the record 12.8 million bpd the U.S. produced in early 2020.
 
 
 
mocowgirl
Professor Quiet
3.1.9  mocowgirl  replied to  mocowgirl @3.1.7    3 weeks ago
It is very hazardous to our environment

An article that mentions just some of the hazards to our health.  This is from 2013.  

Fracking hell: what it's really like to live next to a shale gas well | Fracking | The Guardian

Fracking hell: what it's really like to live next to a shale gas well

Nausea, headaches and nosebleeds, invasive chemical smells, constant drilling, slumping property prices – welcome to Ponder, Texas, where fracking has overtaken the town. With the chancellor last week announcing tax breaks for drilling companies, could the UK be facing the same fate?
Campaigners warn that fracking is binding the US even more tightly to a fossil-fuel future and deepening the risks of climate change. There have been stories from homeowners of fracking chemicals seeping into their drinking water,  video footage of flames shooting out of kitchen taps because of methane leaks . Companies have been fined for releasing radioactive waste into rivers.
Fracking has not had an easy start in Britain. In April 2011,  two small earthquakes and dozens of aftershocks occurred when Cuadrilla Resources  drilled its first well in Weeton, Lancashire. The tremors could be felt as far away as Blackpool. The company halted its operations for a seismic investigation, but continued work on its other wells.
 
 
 
Drinker of the Wry
Freshman Principal
3.1.10  Drinker of the Wry  replied to  mocowgirl @3.1.7    3 weeks ago

Thanks, I didn’t realize that the topic was fracking, I was thinking about conventional oil wells.

 
 
 
mocowgirl
Professor Quiet
3.1.11  mocowgirl  replied to  Drinker of the Wry @3.1.10    3 weeks ago
I was thinking about conventional oil wells.

I don't know that there are any conventional oil wells being drilled since fracking became legal less than two decades ago.  

I don't know if was ever possible to pour enough concrete to replace the displaced oil or if it would have been cost effective to do so.

 
 
 
Nerm_L
PhD Principal
3.1.12  Nerm_L  replied to  Ender @3.1.2    3 weeks ago
A strange thought. I always wondered what will happen when oil is pumped out and leaves a cavern below. A cave in eventually?

From the standpoint of geophysics, oil extraction isn't that different than water extraction.  Both oil and water have seeped into an existing porous matrix of sand, gravel, or stone.

Pumping oil would have the same geophysical effect as pumping water.  It's unlikely that pumping either oil or water would leave behind a cavern.  But removing the oil or water from a porous matrix could result in subsidence.

 
 
 
Revillug
Freshman Guide
3.2  Revillug  replied to  mocowgirl @3    3 weeks ago
A key worry for the U.S. is that a stronger dollar makes U.S.-made products more expensive in overseas markets

Good thing we really don't make anything here anymore.

 
 
 
Nerm_L
PhD Principal
3.3  Nerm_L  replied to  mocowgirl @3    3 weeks ago
If US oil becomes unaffordable to European consumers, what will happen to the US led Russian oil embargo?

The embargo is entirely political; attempting to use economics as a coercive weapon.  The reduced supply of oil to Europe was strictly a political choice made in an autocratic manner.  So, the question becomes will autocratic institutions in Europe retain their power?  Will autocracy become stronger or weaker in Europe?

The Russian oil embargo doesn't affect the supply of oil (and natural gas) in the United States.  The embargo has increased oil prices because of the globalization of the oil market but the actual supply in the United States hasn't changed.  Global oil prices have risen to more than $100 per barrel before but gasoline prices have never been this high before.  That should tell us that what is happening isn't just about oil prices.  Domestic policy in United States has reduced capacity to process oil into useable products but that doesn't have anything to do with supply or price of oil.

 
 
 
mocowgirl
Professor Quiet
4  mocowgirl    3 weeks ago

I had an email from Forbes this week that addressed business concerns about the rising dollar value.

U.S. Dollar’s ‘Extreme’ Rally Threatens To Tank Stocks And Spark ‘Major’ Market Stress In Coming Weeks (forbes.com)  

Despite soaring inflation pushing its buying power down domestically, the U.S. dollar has posted a staggering rally this year, and while that's good news for Americans traveling abroad, Morgan Stanley on Monday warned many U.S. companies will suffer as their international businesses become less profitable—forcing many to cut earnings projections and tanking their stocks as a result.

Buoyed by demand for  safe-haven  assets as Federal Reserve policy tanks stocks, the U.S. dollar index, which tracks the price of the dollar's price against six foreign currencies, has surged 16% over the past year—a rally that's "about as extreme as it gets, historically speaking," a team of Morgan Stanley analysts led by Michael Wilson wrote in a Monday note to clients.

Unfortunately for investors, such rallies "typically coincide with major financial stress in markets, a recession—or both," the analysts write, noting a stronger dollar can deter international demand for U.S. companies, which generate some 30% of sales abroad, as they continue to grapple with inflation,  unwanted  inventories and  weaker  consumer spending.

KEY BACKGROUND

Fueled by government stimulus and the war in Ukraine, prolonged levels of  high inflation  pushed the Fed to embark on the most aggressive economic tightening cycle in decades—crashing markets and sparking recession fears. Adding to concerns, the U.S. economy  posted  its worst showing since the Covid-induced recession in the first quarter, shrinking 1.6% despite expectations originally calling for 1% growth. Though stocks have rallied about 5% in recent weeks, the S&P 500 is still down nearly 20% this year, and the tech-heavy Nasdaq has plunged 28%.
 
 

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