Is the Euro losing the parity race?

Is the Euro losing to the US dollar?

The EUR seems to be falling behind the parity race versus the USD. For the first time in about 20 years, it went below the parity against the USD last Wednesday. The global recession is the main contributor to the Euro’s decline.

Although the single European currency started an excellent year, recovering well from the post-pandemic situation, the region’s rising gas prices, Moscow cutting off the gas supplies, and Russia’s march over Ukraine have flamed the recession and hit the Euro.

The US Federal Reserve Bank has played well in the heightened global uncertainty by aggressively raising the rates. The US monetary policy move has put the US dollar in an advantageous position.

(Euro slumps lower – Reuters)

What does it mean?

It means that both the currencies are equal, meaning that the Euro and the US Dollar are worth the same.

The currency exchange rate defines the region’s economy – a falling euro rate, is an indication that Europe’s economy is sliding.

Record inflation coupled with rising energy prices is the main reasons. The war in Ukraine has increased the fear of losing Russian oil and gas in the global market. As Europe has a higher dependency on Russian oil compared to the US, it has been the main factor for higher energy prices in Europe.

The region’s inflation peaked at 8.6% in June due to higher energy prices. Everything from groceries to utility bills became more expensive due to inflation. It is feared that if Russia continues to shut off the gas flows, the governments of European nations will move towards implementing rations on gas supplies to major industries, adding to the gloom.

Euro in relation to other major currencies

It fell against the sterling and yen and sloped to a record low against the Swiss franc in seven years. Some observers see the positive and call it a bottom.

EUR/USD

EUR/GBP

EUR/CHF

EUR/AUD

EUR/JPY

Euro has lost its value compared to other major currencies in the World. Euro is the most stable when compared with the US dollar and it has dropped the most when compared to the Japanese Yen.

European Central Bank’s actions

Euro’s growth forecast was downgraded when the European Central Bank announced raise in interest rates. Based on the current assessments, the ECB made a statement this week that the Governing Council aims and believes in slow but sustainable economic progress after September due to the increase in interest rate.

However, the changing fiscal policy of the Governing Council will be based on the latest incoming data and factors contributing to inflation. The primary objective is to achieve a 2% medium-term target this year.

Where is it headed?

Euro is in a very tough spot and might face strong headwinds in the future. The actions taken by the ECB are not reaping as expected due to the timely moves by the US Fed.

Nomura Holdings predicts 0.95 to a US dollar in the short-term, and several other experts think the same. According to analysts, the Euro will remain unstable until the economic situation improves. Raising rates by the European Central Bank may not help much because the US Federal Reserve has already taken measures and will top the ECB in raising its interest rates and pulling cash into the US. Further, the Euro faces the fragmentation risk where the weaker economies will face higher borrowing costs and adversely affect the stronger states.