The euro has reached parity with the dollar, a first since 2002. The European currency has been undergoing a very sharp decline for several days, about 13% over a year. This depreciation is accompanied by high inflation and a slower growth. Here are five-points to assess this violent phenomenon which affects both companies and individuals.
1. Why is the euro falling so hard?
The fall of the currency is the result of multifactorial causes: inflation, fears of recession, war at Europe's doorstep, etc.
Inflation in the energy and raw materials sectors is coupled with a slowdown in growth. Ukraine’s situation reveals a series of economic threats. Economic activity in the euro zone slowed significantly in June, reaching its lowest level for the last 16 months. PMI index 07.22. This concern is also fueling the fall of the euro, while the dollar continues to climb, reaching near parity with it.
The dollar rises indeed because it is stimulated by the Fed's monetary policy. They raised its key rates by three quarters of a point in mid-June, while the ECB is a month behind. Investors are betting that the Fed will continue to raise rates, so the dollar is strengthening in its role as a safe haven against the euro.
2. What are the historical highs and lows of the euro against the dollar?
The euro's all-time low of $0.8230 was reached on October 26, 2000. The value is lower than its introduction price in January 1999, in the context of the recession of the early 2000s.
On July 15, 2008, the euro surpassed the $1.60 barrier and reached its highest level in history. This peak was primarily due to a fall in the greenback, which was weighed down by the subprime crisis.
On May 8, 2014, the euro was at its highest level reached since late October 2011, at $1.3993. The decision of the European Central Bank to leave its key interest rate at a historically low level was a major factor, while the economic recovery is confirmed in the euro zone, after the debt crisis.
On March 16, 2015, the euro fell back to $1.06. Due to ECB's adoption of measures to support the economy back in June 2014. Their implementation, with a further cut in key rates at the end, was intended to depreciate the euro against other currencies to support European growth and achieve the ECB’s inflation target.
In 2018, the return of growth in the Eurozone, and doubts about the U.S. economy, caused the euro to soar against the dollar. Then on February 2, 2018, the euro reached 1.25 dollars.
In early 2020, the European currency suffers from fears related to the spread of the coronavirus epidemic in China. On March 20, 2020, the euro drops to $1.07. The last stage, the euro is worth 1.0072 dollars on Monday 11 July: it is almost at parity.
3. Who benefits from the fall?
A currency depreciation generally stimulates activity: products sold in the currency concerned become more competitive and exports are boosted.
In the euro zone, the manufacturing industry is the main beneficiary of this effect because it exports more. The most favored sectors are luxury goods and aeronautics, which sell a lot in the dollar zone. Another favored sector: the agri-food industry.
The euro/dollar parity will also benefit the tourism sector with an increase in the purchasing power of American, Qatari and Jordanian visitors.
According to a study conducted by MKG, the number of overnight stays by American tourists is particularly sensitive to the two currencies’ value. This is an advantage that needs to be qualified because, according to Jean-François Rial, President of the Paris Convention and Visitors Bureau, "the return would have been the same with a stronger euro, especially since the increase in stays is particularly visible in the palaces.”
4. Who suffers?
The big losers are small, non-exporting companies and households, whose purchasing power is being eroded.
“For a large majority of French and European economic actors, this depreciation of the euro is an aggravating factor. Many flows between Europe and Asia are denominated in dollars, as are raw materials and electronic components," explains Emmanuel Arabian, CFO of an industrial group and board member of AFTE. This weakening will therefore weigh on imports.While the price of oil has risen by about 46% in dollar terms since the beginning of 2022, the price in euro terms has risen by almost 60%. And while treasurers of large companies are well versed in protecting themselves against currency risks, SMEs are often relatively powerless.
Individuals are directly affected in their daily budgets. The average inflation rate in the euro zone reached 8.6% in June (nearly 6% in France, 7.6% in Germany, 10.2% in Spain). Two consequences: a loss of purchasing power, and the beginning of a slowdown in consumption. (in the food sector: -0.3% in May 2022). Households are also saving on online sales and fuel. Furthermore, on a more local scale, Jacques Creyssel, General Delegate of the Federation of Commerce and Distribution, argues that French people have already reduced their consumption of leisure, clothing and hygiene products.
Last but not least, another negative consequence is tourism abroad, especially in the dollar zone. Summer travel across the Atlantic has become a luxury.
5. What can monetary institutions do?
To control inflation, the European Central Bank has launched a movement to increase its key rates. This is a tricky solution to handle, because if it acts too hard on this lever, it risks penalizing weak growth. The result could be catastrophic for some countries whose debt would become too heavy to bear.
The European institution is currently considering how to meet this challenge. The task is both technical and political. In the meantime, the global economic situation and the conflict in Ukraine are likely to weigh on the situation. In this context, any recovery of the euro should be seen "as a short-term rebound", warns Fawad Razaqzada, analyst at StoneX, who fears that without major changes on the international front, the euro will continue to decline.
As a conclusion, PBS hour news published : “If you think Euro at parity is cheap, think again,” Robin Brooks, chief economist at the Institute of International Finance banking trade group, tweeted Monday. “German manufacturing lost access to cheap Russian energy & thus its competitive edge.”
“Global recession is coming,” he said in a second tweet.