Euro Hits Parity With U.S. Dollar for First Time in 20 Years

Let’s take a look: € 1 = $ 1.

Wars at the eurozone borders, uncertain energy supplies from Russia, and increased risk of recession have finally put pressure on the euro so strongly that it fell to the same level as the US dollar on Wednesday — 1 pair. 1 exchange rate.

It has been an invisible sight since the early December 2002 when the currency existed. The number of aesthetically pleasing rounds is the focus of investors.

Analysts at Dutch bank ING said in a note to clients that “1.00 is probably the largest psychological level around” in the forex market.

More notable than above this level is how rapidly the euro has fallen against the dollar. The currency shared by 19 European countries has fallen by more than 11% this year as the dollar’s appreciation was almost unmatched.

The euro has fallen sharply as the dollar, one of the safest places to save money for generations, has risen against almost every major currency in the world.

Currencies behave like stocks, bonds and other assets. Investors can buy directly when they think the value will go up and sell it when they think it will go down. Also, buying US government bonds and Apple stock requires the first acquisition of dollars, and many global transactions are done in dollars, which reflects the global demand for national assets. So, as is often the case in times of financial hardship, people looking for a safe place to put money bought more dollars at the expense of other currencies like the euro.

The euro was introduced in 1999 after decades of debate and planning aimed at bringing unity, prosperity and stability to the continent. After two major wars in the first half of the 20th century, the debate over the euro and broader European projects is that a common institution reduces the risk of war and crisis and provides a diplomatic forum for conflict resolution. did. The euro was an important symbol of this unity.

But like all currencies, the euro is only as strong as people’s beliefs about it. It was seriously tested about 10 years ago when investors fled the debt of large debtors and bailouts led to a fiscal policy dispute. The crisis threatened the future of the currency, but faith was almost restored. The euro area, which started in 11 countries, will be the 20th member country next year.

But in recent months, many factors have increased in favor of the euro and the US dollar, which has been reclaimed as heaven during the economic turmoil.

Globally, supply chains are disrupted by pandemics and wars in Ukraine. Since the invasion of Russia in February, prices of essentials such as oil, natural gas, wheat and fertilizer have skyrocketed, pushing up food and energy prices around the world. That led to the highest inflation rate in decades.

Central banks in the United States and Europe are now promising to reduce inflation through higher interest rates, despite the deteriorating outlook for the global economy. China’s production restrictions under Covid-19 rules have exacerbated the risk of a recession, but efforts to separate Europe from Russia’s energy have proven difficult to achieve. These trends have strengthened the dollar, while offering little to help the euro.

Ebrahim Rabari, Global Head of Forex Analysis for Citi, said:

The depreciation of the euro has exacerbated concerns that the euro area will be in recession.

Last week, uncertainty about the future of Europe’s energy supply and growing concerns that Russia would permanently close its critical natural gas pipeline to Germany pushed the euro to its lowest level in 20 years.

However, bets on parity have piled up a few months ago. Since April, Jordan Rochester, a strategist at Japanese bank Nomura, has bet that the euro will be on par with the dollar. Similar predictions continued, including JPMorgan Chase and HSBC.

After that, I took a short break on the Euro slide. In particular, European Central Bank Governor Christine Lagarde announced in July a clear plan to raise interest rates for the first time in more than a decade, suggesting that the eight-year era of negative interest rates will end early. autumn. Since then, policymakers have stepped up their commitment, saying that if interest rates rise again in September, they will probably be even higher than in July.

After all, it wasn’t enough to change the trajectory of the currency. “It’s hard to find a positive statement” about the euro, HSBC analysts said in a note to customers in early July. “Economic news is very challenging.”

Around the same time, Nomura’s Rochester said he expected the euro to be on par with the dollar by the end of August. After all, it happened much faster.

“It’s very human psychology,” Rochester said. There is no market-based reason why parity is important — “it’s just an approximation,” he added. However, it could be the beginning of a period similar to the beginning of the currency, where the transaction was in the range of $ 82 to $ 1 against the euro.

In the early 2000s, the euro existed in the form of banknotes and coins, and before it became just a cryptocurrency, low exchange rates weakened confidence in new currencies. The European Central Bank even intervened to strengthen it.

As the union is strengthening today, there are fewer questions about the resilience of the euro. The central bank’s commitment to maintain the currency 10 years ago has not been significantly tested since then.

However, the depreciation of the currency brings further headaches to the European Central Bank. Because it increases inflationary pressure in the region by increasing import costs. The central bank says it isn’t aiming for exchange rates, but the forces pushing up the dollar are so strong that it will be difficult to stop the currency from depreciating in words.

Inflation in the United States has reached its highest level in 40 years, and the Federal Reserve has tightened monetary tightening with a sharp rise in interest rates. Federal Reserve Chair Jerome H. Powell said at a meeting in late June that he expects benchmark rates to reach 3.5% this year. He added that while there is a risk that central banks will go too far in raising interest rates to cool the US economy, keeping inflation high is a greater risk.

As Powell said, he was sitting next to Lagarde at the European Central Bank’s annual retreat in Sintra, Portugal. She agreed with him on the risk of sustained inflation, but did not match his commitment and clarity on how high interest rates could rise in the euro area. Investors can only guess what will happen by the end of the year.

But even before the first rate hike, on July 21, with the increased risk of a recession in the euro area, investors wonder how high a bank can raise rates before it has to shut down again. I’m thinking.

“The ECB will have a hard time keeping up with the Fed’s decision to deal with inflation and push up interest rates,” said Citi analyst Lavali.

The European Central Bank plans to raise rates, but it must also keep an eye on the sovereign debt market. There were concerns about the impact of rising interest rates and the termination of the central bank’s bond purchase program on the most debt-bearing members of the block.

In Italy, for example, borrowing costs soared in June, and authorities fair how many of these moves reflect the risks of Italy’s financial situation and so-called fragmentation, or rapid fluctuations in interest rates across the euro area. I’m trying to figure out. Members who reduce the effectiveness of monetary policy. Banks are preparing new policy tools to deal with that fragmentation. Central banks see this as a break between economic fundamentals and government borrowing costs.

“Next year will be another time of challenge for the euro area and its central banks,” Lavali said.