A sight unseen since 2002, in the early years of the currency’s existence. 1 EURO = I Dollar. With an ongoing war on the eurozone’s border, an uncertain energy supply crisis from RussiaWith, and a growing risk of recession, the euro finally grew so strong that on Wednesday it dipped to parity with the U.S. dollar – a one-to-one exchange rate. The currency, shared by 19 European countries, has slumped more than 11% this year, as the dollar’s strength has been almost untouchable. “Gas rationing, stagflation, an expected recession, they are all good reasons to be bearish on the euro,” said Stuart Cole, a head macroeconomist at Equiti Capital in London. He further said that “these factors will make it harder for the European Central Bank to hike interest rates, further widening the interest-rate differential with the United States.”
Reasons for the Euro Drop
The euro is the second most sought-after currency in global foreign exchange reserves and daily turnover in the euro/dollar is the highest among currencies in the global $6.6 trillion-per-day market.
Another reason which has led to the highest inflation rate is the disruptions in global supply chains, globally, and the prices of essential commodities including oil, natural gas, wheat, and fertilizer have soared, pushing up food and energy prices around the world. The euro’s sharp decline has come as the dollar for generations has been one of the safest places to park money. The euro’s slide is a struggle for the ECB. Allowing the currency to fall only fuels the record-high inflation the European Central Bank (ECB) is battling to contain. But trying to shore it up with higher interest rates could exacerbate recession risks.
Currencies move like stocks, bonds, or any other asses – investors can buy them directly when they think they will grow in value and sell when they think they will decline. They also reflect global demand for a country’s assets in general, because buying U.S government bonds or apple stock requires getting dollars first, and lots of global trading takes place in dollars. So, in times of economic distress, people looking for a safe place to put their money have bought more dollars, at the expense of other currencies like the Euro.
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Now central bankers in the United States and Europe have committed to bringing down inflation through higher interest rates, even as the global economic outlook decreases. “The risk of recession has been worsened by restrictions on Chinese production because of Covid-19 rules, while efforts to wean Europe from Russian energy are proving difficult to accomplish. These trends have made the dollar stronger while offering little to help the euro” was said in a report. Today there are lesser questions about the resilience of the euro as progress has been made in firming up the union. The commitment given by the central bank to preserve the currency a decade ago has been significantly tested ever since.
The euro was introduced in 1999 after decades of discussion and planning, to bring unity, prosperity, and stability to the continent. The euro was a critical symbol of this unity. The euro is only as strong as people’s belief in it. The eurozone, which began with 11 countries, will welcome its 20th member next year.