Topline
The euro and the U.S. dollar are equal for the first time in 20 years, as Russia threatens to cut off gas to the west and inflation rates soar, sparking fears of a European recession.
The euro and U.S. dollar are equal for the first time in 20 years. (Photo by Sean Gallup/Getty … [+]
Key Facts
The euro slipped as low as around $1.00005 Tuesday morning, but has since inched up to $1.0061.
Greg McBride, chief financial analyst with the New York financial company Bankrate, told Forbes the effect on imports and exports will be relative, increasing the cost of American goods sold in Europe while making European goods cheaper in the U.S., helping to ease the effect of rising inflation.
“Going to Europe looks a lot cheaper to Americans compared to last summer,” Moody’s Analytics chief economist Mark Zandi told USA Today on Tuesday, noting a stronger dollar can offset the cost of rising airfare by 10% to 20%.
With the two currencies roughly even, McBride said it could be a “headwind for multinational companies,” who can now expect a greater return when they convert euros to dollars.
European stocks initially traded lower on Tuesday – with the London-based FTSE 100 down 0.29% and the German DAX Performance Index down 0.17% as of 10 a.m. ET – but have since rebounded, up 0.18% for the FTSE and 0.57% for the DAX at 2 p.m. ET.
Key Background
The euro has been on a steady decline since last May – when one euro was worth $1.22 – and has fallen precipitously over the past five months, from $1.13 – as Russia’s war in Ukraine continues and Russia threatens to cut off gas supplies to Western Europe. The dollar, on the other hand, continues to surge, as the U.S. dollar index increased to 16% over the past year on Monday, despite inflation rates and a lower domestic buying power – a good sign for Americans spending time across the Atlantic, where the dollar holds more weight, but potentially an indicator of “major financial stress” for U.S. companies abroad, according to economists at Morgan Stanley. Inflation rates have soared throughout the U.S. and the eurozone, where both areas hit rates around 8.6% last month – primarily on energy (41.9% annual increase in Europe and 34.6% in the U.S.). The European Central Bank, in response, has called for a 25-basis-point interest rate hike to combat rising costs – a slower rate than the U.S. Federal Reserve is raising interest rates at 75 basis points – as it aims for its target of 2% inflation over the medium term. An increase in borrowing costs would be the ECB’s first since 2011.
Tangent
On Monday, Russia shut down the Nord Stream 1 pipeline – which carries gas from Russia to Germany through the Baltic Sea – for routine maintenance, sparking fears Russia could deliberately extend the 10-day closure in retaliation to Western sanctions. That could spell skyrocketing energy costs across Europe. Germany’s economy minister Robert Habeck warned economists last month of industry shutdowns and job losses if Germany’s energy reserves dwindle even more.
What To Watch For
Whether the euro will sink below the dollar, something that hasn’t happened since 2002, when the Euro fell to $0.99, just three years after the currency was created.
Further Reading
The US Dollar Is Still King, And Investors Can Make The Most Of It (Forbes)
Source: https://www.forbes.com/sites/brianbushard/2022/07/12/euro-and-dollar-are-equal-for-first-time-in-20-yearsheres-what-it-means-for-americans/