The euro is close to parity with the dollar - what could be the consequences of its fall in value?

The euro is close to parity with the dollar – what could be the consequences of its fall in value?

EURON Approached parity with the dollar today as traders bet on the prospect of a recession in the eurozone caused by soaring inflation.

The euro fell below $ 1.02 this week to its lowest level in 20 years. It even dropped to $ 1.0072 over a period today.

The European single currency is also suffering from the Federal Reserve raising US interest rates more aggressively than the European Central Bank, traders said.

Here are the concrete consequences of the decline in the value of the single European currency.

Inflation, purchasing power

Almost half of all goods imported into the euro area are invoiced in dollars, compared to less than 40% in euros, according to the European Statistical Office Eurostat.

Oil and gas, for example, are traditionally paid for in dollars, and the price of these two commodities has skyrocketed in recent months as a result of Russia’s war with Ukraine.

This means that more euros are needed to pay for the corresponding amount of goods in dollars.

“Imported goods become less competitive, compete with each other and therefore become more expensive,” which drives inflation and erodes the purchasing power of households, says Isabelle Mejean, professor at Sciences Po.

A specific effect of the fall of the euro against the dollar is that it will “dampen European tourism, especially to the United States”, says BNP Pariba’s economist William De Vijlder.

Because European visitors will have to spend more euros to buy the equivalent amount in dollars, which greatly pushes up the total cost of their trip to the US, but also to other countries whose currencies are pegged to the dollar, such as Qatar or Jordan.

On the other hand, visitors to Europe from the United States, Qatar and Jordan benefit from the exchange rate, as their dollars buy them much more in the euro area than before.

Business

The effect of the decline in the value of the euro varies depending on how dependent a company is on foreign trade and energy.

“Companies exporting outside the euro area are benefiting from the fall of the euro as their prices become more competitive” when converted into dollars, says Philippe Mutricy, head of research at the public bank Bpifrance.

“However, import-oriented companies are at a disadvantage.”

In the case of local artisans, who depend on raw materials and energy but export little, the weaker euro could lead to a veritable cost explosion.

The biggest winners from the euro’s falling exchange rate are export-oriented manufacturing sectors such as the aerospace, automotive, luxury goods and chemical industries.

And large players are “better prepared for shocks” because they can hedge against currency fluctuations, Mutricy said.

“They buy foreign currency in advance at favorable prices to dampen them against sharp fluctuations in the exchange rate.”

Growth and debt

The fall in the value of the euro makes prices outside the single currency area more competitive, which theoretically gives a boost to exports of European goods and services abroad.

# Open journalism

No news is bad news
Support the newspaper

Your contribution help us continue to deliver the stories that are important to you

Support us now

But the positive effect can be mitigated by rising commodity prices in the wake of the war in Ukraine, especially in export-oriented economies such as Germany.

The effect on debt repayment is less clear.

The higher the economic growth rate, the faster a country can repay its debt, said Mejean of Sciences Po Paris.

But only on the condition that the financial markets consider that the European debt is sufficiently secure and that interest rates remain low.

For countries that issue debt in dollars, the decline in the value of the euro against the dollar pushes up the cost of repaying debt.

central banks

By inflating inflation, the fall of the euro could cause the European Central Bank to raise interest rates faster. Preparations are underway to tighten borrowing costs for the first time in 11 years in July.

“It can be said that the ECB would not react to rising commodity prices, but the challenge of regaining control of inflation increases as the exchange rate pushes up import prices,” said De Vijlder.

The Banque de France also said at the end of May that the weakness of the euro could complicate the ECB’s efforts to curb inflation.

© – AFP, 2022


#euro #close #parity #dollar #consequences #fall

Leave a Comment

Your email address will not be published.