1 EURO = 1 DOLLAR

Euro Dropped Below Parity Against The Dollar In 20 Years

Euro Dropped Below Parity Against The Dollar 

For the first time in almost 20 years, Europe's single currency has dropped below parity against the dollar, battered by growing recession fears in the euro area. In other words, in terms of the exchange rate, 1 euro became tantamount to 1 US dollar. On Wednesday, it slumped to as low as $0.9998 & is down almost 12% so far this year. This is only the 2nd time since 2002 that the euro has plummeted this low to a dollar. Investors are pulling out money from the Eurozone & into the US due to the weakening in the euro against the dollar .

Euro Against Dollars in Past 20 years

Since 15 July 2002, the euro hasn’t been valued below $1. It’s now below $1.01. The Euro hit its all-time high of $1.18 shortly after its launch on 1 January 1999, but then began a long slide, falling through the $1 mark in February 2000 & hitting a record low of 82.30 cents in October 2000. It rose above parity in 2002 as large trade deficits & accounting scandals on Wall Street weighed on the dollar. What seems to be a euro story now, as it was then, is also in many ways a dollar tale. This is due to the US dollar's continued dominance as the default currency for international trade and central bank reserves. Along with the euro, the dollar has been trading at 20-year highs versus all its main trading partners' currencies. The dollar is also benefiting from its status as a haven for investors in times of uncertainty. The euro has seen a rapid rise in popularity over the course of its comparatively short history of two decades & it is the second-most sought-after currency in global currency reserves. In the $6.6 trillion daily global currency market, the euro/dollar pair has the biggest daily turnover of any currency.

Factors Affecting the Exchange Rate

 Broadly speaking, the euro has been dampening against the dollar since the start of 2008. However, the decline has been sharp since the start of 2021. The energy crisis in the wake of Russia’s war against Ukraine has given the latest blow to the exchange rate. The cause for the euro's continued weakness against the dollar can be broken into two parts. One, the weakness of the Eurozone’s economy. Two, the difference in the monetary policy response between European central banks & the US. Recession forecasts are taking in place of hopes that the economy will improve after recovering from the COVID-19 outbreak. Fears that the Kremlin won't resume exports this month intensified when the important Nord Stream 1 pipeline from Russia to Germany had to be shut down on Monday for routine maintenance.  

Effects on global investors

 Global investors make the safest bet for the dollar & news outside the US economy is worse than it is in the US. The dampening in the euro against the dollar can also be seen as part of the larger story where the US dollar is profiting against all currencies of the world—be it the euro, or the Japanese yen or the Indian rupee. Now, the rupee has appreciated considerably & as such, Indians holidaying in Europe will figure it out cheaper to travel. If the euro continues to weaken, the rupee, which is already just a whisker away from 80 to a dollar, will further dampen against the dollar. This is because India and other emerging economies have extensive trading relationships with the euro. The rupee has performed better than euro against the dollar because the RBI has intervened in a manner to ensure rupee stays that way. 

The specter of stagflation, a perilous concoction that stagnates growth while keeping things prohibitively expensive for both businesses & consumers, has come back due to the interaction of the two causes. Interest rates has already been increased to rein in inflation by the European Central Bank (ECB), & the ECB plans to do so in the future as things get worse. As Croatia finishes the process of joining the eurozone & becomes the 20th EU member state to adopt the common currency, the dollar & the euro have reached parity. A new downward revision is expected to be announce to its updated economic outlook by The European Commission. Brussels has purposefully abstained itself from issuing any definitive forecasts about an impending recession for the time being & is still optimistic that the eurozone will be strong enough to handle the disruption caused by the conflict in Ukraine & the energy issue.