With The Euro And Dollar Trading At Parity, Europe’s In A Tough Spot

With The Euro And Dollar Trading At Parity, Europe’s In A Tough Spot
Reda Farran, CFA

over 1 year ago1 min

As of today, you can buy one euro with one US dollar for the first time in 20 years. That’s a big drop from just a few months ago, when €1 would’ve cost you $1.15.

There are a couple of reasons why this has happened. First, a stronger dollar: it’s appreciated against virtually all major currencies this year on the back of the Fed’s most aggressive rate hiking campaign in decades. Higher interest rates, after all, make the dollar more appealing to international savers and investors. The European Central Bank, meanwhile, hasn’t touched its interest rates.

Second, the weakness of the euro, which has been hit again this week by concerns that Russia is going to cut even more of its European natural gas exports. That would cause energy prices to climb even more, dent consumer spending and industrial output, and probably trigger a recession in the region.

The big problem here is that the parity between the two is only going to add to inflationary pressures in Europe. After all, the region depends on oil and natural gas imports for most of its energy needs, and those commodities are priced in dollars. So as the euro has sunk against the greenback, the region’s energy import costs have been rising. That’ll push prices up even more, in a phenomenon known as “imported inflation”.

Put simply, Europe is caught in a vicious cycle, with higher energy prices hurting the region’s economy, driving the euro lower, and increasing the cost of energy imports even more. And that’s going to be a very tricky cycle to get out of…

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