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Euro-Dollar Parity

Growing expectations that the European Central Bank could raise rates by another .5 per cent at its upcoming September meeting are doing nothing to slow the euro’s depreciation. The euro has hit a new 20-year low and has even fallen below the dollar.

Fears of economic recession, precipitated by rapid rate hikes by central banks, are undermining the euro’s value, which has depreciated 12% against the dollar so far in 2022. Its fall has accelerated since early April, with a decline since then of 10%, coinciding with investor concerns that central banks’ restrictive policies to combat inflation will be at the expense of economic growth. And in this context, in the midst of an energy shock with gas prices at record highs, the eurozone has much more to lose.

Current euro levels are their lowest since September 1999, the year the euro was introduced. It also marks a new seven-year low against the Swiss franc, falling to 0.9603 francs per unit, the lowest level since January 2015.

The Fed and the ECB

Although the ECB is determined to keep raising rates, the Fed’s determination to fight inflation is weighing much more heavily on the currency market, favouring the dollar and exacerbating the euro’s weakness. It also became known today that China’s central bank has cut its benchmark interest rate, a move that was already expected but which fuels market fears of a slowdown in the world’s second-largest economy. The yuan has depreciated to almost two-year lows.

The outlook for the euro will continue to be weak, as investors are pricing in the risk of recession, and they estimate a target level for the euro at the end of September of 0.975 dollars, definitely below parity with the dollar. Other banks do not rule out that the euro could depreciate to 0.95 dollars.

The euro is thus reflecting the disadvantage the eurozone faces vis-à-vis the US in the face of a recession scenario. Thus, although there is still no conclusive data, inflation could be close to having reached a ceiling in the US, according to the moderation in the rise in prices recorded in July, while in the eurozone, prices continue their relentless upward climb. The Bundesbank itself has advanced today in its monthly report that inflation in Germany will continue to accelerate and could exceed 10% this autumn.

The unstoppable rise in energy prices, with gas prices at record highs after the war in Ukraine, is a continuing inflationary threat to the euro area that the US economy suffers much less intensely. The US Fed also has more room for manoeuvre to fight inflation without overly damaging the economy, with unemployment at record lows and at pre-pandemic levels, all of which work against the euro.

The depreciation of the European currency is also an added complication when it comes to containing inflation, since most of the raw materials consumed in the eurozone are imported and paid for in dollars. Thus, the purchase of a barrel of Brent crude oil, which has risen by almost 25% so far this year, is even more costly as it is made in a currency, the euro, which will depreciate by 12% in 2022 against the dollar, the currency in which it has to be paid for.