For the first time in two decades, the value of the US dollar equals that of the euro, as Europe grapples with growing recession fears and the fallout from Russia’s war in Ukraine.
According to some experts, the euro matching or falling below the dollar represents a mostly psychological milestone, but central banks and policymakers across the European Union are likely to face pressure to address depreciation concerns.
According to Bloomberg, the two currencies reached parity Wednesday morning, after the euro abruptly lost value following alarming U.S. inflation data.
The euro has been losing ground against the dollar since the beginning of the year, when it was hovering around $1.13, a long way from its peak of nearly $1.60 in 2008. MarketWatch’s live currency data show the euro slipping a few hundredths of a cent above the dollar, while Bloomberg and Reuters reported that the euro briefly fell below the dollar in value.
Analysts believe the euro’s depreciation reflects growing risk aversion on the part of investors, who are pouring money into the dollar, which is considered a “safe haven” asset in comparison to other currencies, amid concerns about inflation, the Ukraine war, and recession fears in a number of countries.
Currency markets were jolted Wednesday morning when the U.S. Bureau of Labor Statistics reported that consumer prices in the United States increased by 9.1 percent in June compared to a year ago, setting a new high with inflation running at 40-year highs.
During the months-long conflict in Ukraine, which has sent shockwaves through global food and energy markets, the common currency in 19 E.U. member countries has weakened. The European Central Bank also lags behind peers such as the Federal Reserve in combating rising inflation, which reached 8.6 percent last month — the highest level since the euro was introduced in 1999.
The Fed has been aggressively raising interest rates to combat inflation, announcing three rounds of increases this year alone and signaling four more scheduled rate hikes. Although the European Central Bank is expected to raise rates to bring inflation back to the 2% target, it is expected to do so at a slower pace: it has penciled in a 0.25 percent rate hike for July, while the Fed is widely expected to do the same in June.
The stronger dollar is good news for Americans planning a trip to Europe or purchasing goods abroad. Traveling and spending in US dollars, on the other hand, has become more expensive for those earning in euros.
Businesses in Europe that sell their products abroad may find that a weaker currency makes their exports more appealing because the buyer’s currency is more valuable in comparison. American businesses, on the other hand, may have a more difficult time exporting their goods abroad.
More importantly, some experts believe that a weaker euro portends slower economic growth in Europe. “It’s becoming increasingly clear that the Eurozone is on the verge of a recession, despite financial conditions tightening more than in the United States or Japan,” tweeted Robin Brooks, chief economist at the Institute of International Finance.
Following the outbreak of the Ukrainian conflict, the Economist Intelligence Unit reduced its 2022 Eurozone growth forecast from 4% to 2%. It forecasts 1.6 percent growth in 2023. Furthermore, the euro’s weakness “reflects investor fears of an impending eurozone recession,” according to EIU global forecasting director Agathe Demarais.
Following the release of the inflation report, stocks were choppy on Wednesday. Following the release of the CPI data, the Dow Jones industrial average fell nearly 450 points before paring its losses. The blue-chip index was down 115 points, or 0.4 percent, by late morning. The broader S&P 500 index fell 0.1 percent, while the tech-heavy Nasdaq rose 0.3 percent. The CAC 40 in France fell 1.2 percent, the DAX in Germany fell 1.7 percent, and the Stoxx 50 in Europe fell 1.5 percent.