In nearly two decades, the U.S. dollar and Euro are close to parity for the first time. Here’s what to know and how it would impact the economy.
Due to the recent economic tremors in Europe, the Euro has recently continued with its five-year decline, raising the possibility of parity with the U.S. dollar for the first time in 20 years.
This wrestle between the two largest and most traded currencies globally is now coming to the closest fight after a long time with the recent 7% slide of the Euro against the U.S. dollar.
However, specialists are still divided. Will we really get the long-waited euro-dollar parity soon? How soon is soon? How will this impact the economy, and what will it mean for investors?
Early this May 2022, the value of 1 euro is playing around 1.05 U.S. dollars and eventually slid down to 1.03 U.S. dollars the following week.
This continuous decline of the Euro is deemed to be a result of market disinclination due to public concerns related to multiple economic tremors.
These primarily include the devastating war between Ukraine and Russia, continuous upstream inflation rate, issues in business logistics, lack of growth, and strengthening of financial regulations, which have caused investors aversion, leaning towards traditional and much safer assets, consequently resulting in a much-strengthened U.S. dollar.
On top of this, changes in financial regulations within the U.S. and European central banks impacted this narrowing of euro-dollar parity.
Last May 2022, the U.S. Federal Reserve increased its loan rates by 0.5 % for the second time this year as it expects a rise in the inflation rate.
Recently, the Chair of the Federal Reserve of the United States, Jerome Powell, reaffirmed the central bank’s goal to lessen inflation and pull it down closer to 2 percent. Powell announced that they would continue raising loan rates as necessary until inflation declines to a much more controllable measure.
On the contrary, the European Central Bank has not yet made any increments to their interest rates in spite of Europe’s continuous inflation hike across states. Although the ECB has acknowledged how the unrestrained decline of the Euro impacts market stability which causes price hikes for U.S.-sourced products, there has been no sign of immediate actions in place.
WHAT WOULD FURTHER PUSH THE EURO-DOLLAR PARITY
Aleksandar Tomic, an economist from Boston College, mentioned that the parity between the two currencies might be sooner than most think and could possibly happen within the following months.
Market experts indicated that the way to a euro-dollar parity might need another major decline in the European economy relative to the U.S., something similar to what happened after the war between Russia and Ukraine.
Samuel Zief from JPMorgan pointed out that even though Europe would be shaken by something similar, the supposed parity between the two currencies will be the worst-case scenario.
Zief also noted that the U.S Fed’s hawkish increase in interest rates already covers the supposed hike for the next two years, which does not look good for the Euro.
Specialists from the Canadian Bank of Montreal suggested that aside from changes in monetary regulations between the Federal Reserves and the ECB, there are also the energy supply deficiencies and payment fluctuations that are pulling down the value of the Euro.
SURGING VALUE OF THE U.S. DOLLAR
Since the start of 2022, the dollar index has been skyrocketing by around 8 percent, even with the subsequent interest rate increase by the Fed.
George Sarravelos from Deutsche Bank pointed out that the industry is now at the point where further monetary and economic tremors erode the Fed’s predictions. At the same time, the rest of the world, specifically Europe, faces the consequences.
Sarravelos suggested that the European economy will continue to surpass the U.S. and dodge any recession, as opposed to what the majority expects.
Although the recent study by Deutsche Bank specified that the American dollar is at its highest peak since the pandemic, their predictive data implies that the euro-dollar valuation would not go down to reach parity.
THE EUR-USD PARITY
Although many currency specialists are still doubtful that the market will reach the long-waited euro-dollar parity, a massive portion of the industry expects the European market to continue the downstream path.
Several economists noted that the recent aggressive action by the European Central Bank is still not at par with that of the U.S. Fed, insufficient to knock off the inflation hike across Europe.
Some experts suggested that a much less hostile approach should be expected from the ECB, with incremental turns in increasing borrowing rates.
Jonas Goltermann from Capital Economics argued that the constant decline of the European economy with its vulnerability in the local and global market clearly implies further downstream for the Euro against the U.S. dollar. He mentioned that the euro-dollar parity could be expected by the end of 2022, in contrast to the Deutsche Bank’s forecast data.