For the first time since the end of 2002, the euro could reach perfect parity with the American dollar. This Friday, July 8, the European currency fell another 1%, falling below the threshold of 1.01 dollar. Unheard of since the appearance of the single currency in the early 2000s.
Just a year ago, 1 euro traded for nearly 1.20 dollars in the United States, proof of the solidity and attractiveness of the single European currency. So how can such a collapse be explained? And how much should we worry about it?
Serial concerns about the European economy
The European currency has been depreciating against the dollar for months now. Initially, it was penalized by a less sustained post-health crisis economic recovery than in the United States (5.7% growth in the United States in 2021, compared to 5.2% in the euro zone) , then by the announcement at the end of 2021 of the upcoming rise in interest rates across the Atlantic. With the dollar safer and more profitable than the euro, investors naturally turned to the greenback.
But things have especially accelerated in recent weeks, with the war in Ukraine, and the increasingly plausible prospect of seeing Europe deprived of Russian gas. “In times of turbulence, the financial markets always tend to favor the dollar, considered more stable. But today, more than ever, the American economy appears particularly reassuring, in view of a Europe handicapped by its dependence on Russian gas, and a China slowed down by confinements.explains Philippe Waechter, head of economic research at Ostrum.
Monetary policy questioned
In this sense, the deterioration of the euro-dollar parity could moreover be considered more as the result of an appreciation of the dollar, than as that of a fall in the euro. “The fall in the euro is much less significant against other currencies, as evidenced by the average effective exchange rate in the euro zone. IIt has only fallen 3% since the start of the year, compared to a fall of 10% between the euro and the dollar”underlines Julien Marcilly, Chief Economist of Global Sovereign Advisory
But in the opinion of some economists, the monetary policy of the ECB would also be partly responsible for the tumble of the European currency. Because unlike the American central bank (FED), which decided to act very early and powerfully against inflation by rapidly raising its interest rates, the ECB is playing it safe, in particular because of the long-term interest rate differentials existing between the various States of the euro zone.
A first increase is expected on July 21, but which is already considered insufficient by some. “For more than two months now, the ECB has promised that it will act against inflation, by raising its rates, and by creating new tools to fight against the fragmentation of the euro zone. Except that nothing happens. This inertia is starting to seriously worry the markets”believes Philippe Waechter.
A fall that risks fueling inflation
In a context of already very high inflation (it reached 8.1% in the euro zone in June), the risk is to further fuel the rise in prices, through imports paid for in dollars. According to the Bank of France « invoicing in dollars represents approximately 60% of our imports from outside the European Union”mainly oil, gas and raw materials.
“Ultimately, a veritable vicious circle is taking place: due to the rise in energy prices, the European trade balance is collapsing, which weighs on the euro, and pushes even more investors to turn away from the euro”explains Philippe Waechter.
In theory, however, having a weak currency is rather advantageous for a country’s trade balance, since it makes it possible to strengthen the exports of companies. But today, this effect is largely offset by the slowdown in world trade, due to the war in Ukraine, and Chinese confinements.
In May, for the first time since reunification, the German trade balance went into the red, with a deficit of just under a billion euros. As for the French trade deficit, it reached a record amount of 13.1 billion euros, again driven by the rise in energy prices.