What's the impact of the euro parity with the dollar? | AP News
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.
Tags
Who is online
87 visitors
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.)
"...deposed."
I think deposed would have been a better choice of word for the above comment.
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.
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.
Not for me, but I’m not an American manufacturer.
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.
If US oil becomes unaffordable to European consumers, what will happen to the US led Russian oil embargo?
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.
An article that gives more information on the relations between the US government and Venezuela.
A strange thought. I always wondered what will happen when oil is pumped out and leaves a cavern below. A cave in eventually?
I am wondering how many working-class people are not going to survive the power plays by the world's robber barons.
Depending on the depth and surrounding geology, cement will be poured into the retired well.
I thought they only did that to cap the well.
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.
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.
more info on fracking wells.
An article that mentions just some of the hazards to our health. This is from 2013.
Thanks, I didn’t realize that the topic was fracking, 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.
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.
Good thing we really don't make anything here anymore.
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.
I had an email from Forbes this week that addressed business concerns about the rising dollar value.