Dollar and Euro at parity

The Impact of the Euro at parity with the Dollar

If you earn in American dollars (USD), and you haven’t already booked your summer vacation, you might want to move quickly to schedule your summer vacation. Right now, Europe seems to be a pretty bargain. Some weeks ago, the Euro and the Dollar reached parity for the first time in 20 years. This means that the European and American currencies are worth the exact same amount i.e  1 EURO equaled 1 USD

This only means one thing — the European economy is headed for a deep recession, no thanks to the Russian government invading Ukraine, primarily because Europe depends on Russian oil and natural gas. Before this parity, the euro was more valuable than the dollar, but it isn’t the case anymore. Although this development isn’t the best news for Europeans, Americans, especially those traveling to countries in Europe will be thrilled to know that their money goes further there for the first time since the early 2000s. 

Why is the value of the euro declining?

Financial analysts ascribed the euro decline to the lax monetary policies of the European Central Bank (ECB) While the ECB has so far refrained from raising interest rates (which is around 9%), the U.S. Federal Reserve has already raised interest rates three times this year in an effort to battle inflation, including the most pronounced rate hike since 1994 in June.  Because of this increase in the interest rate, investments that have interest rates also increased. This factor coupled with the COVID-enforced lockdown in China, which is a major market for bloc exports is the reason the value of the Euro is declining. European countries like Germany have also been crippled by an ongoing energy crisis caused by the war in Ukraine 

What does this mean for Americans? 

Americans who are planning to tour Europe this summer would get to enjoy cheaper hotels, restaurants, and lots more. They would also purchase imported goods like cars and computers at much lower prices. Sounds fun right? Not exactly. This parity is not so much of a win-win situation. Americans who have businesses in Europe will experience revenue/profit loss, that might even lead them to rescind job offers or lay off employees

How are Europeans going to cope?

European households and businesses will be burdened by a falling euro as they already struggle under the weight of record-high inflation. Given that imports are often priced in dollars, a weaker currency would increase their cost. The greater costs of those commodities can further raise local prices when they are used as raw materials or intermediate goods.

The Bottomline 

In recent days, as the European energy crisis has gotten worse, financial analysts are almost sure that the euro will continue its decline below parity have surged, although, they also say that an economic recession (it is almost inevitable at this point) in Europe might solve the soaring inflation rate.

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