Dollar and Euro at Parity: Causes and Implications

Addis Ababa, Ethiopia (12 July 2022)

After months of depreciation, the euro now has the same value as the dollar, signaling the end of the former’s two-decade price advantage over the latter. One euro cost $1.20 last year, and by the beginning of 2022, it had already dropped to $1.13. Since then, the currency has continued to fall in value, reaching parity with the US dollar on Tuesday, July 11. According to a CNN article, the euro could trade below the US dollar in the $0.95 to $0.97 range. Experts interviewed by Aljazeera identified two root causes: rising inflation and the United State’s status as a haven.

Sushanta Mallick, professor of international finance at the Queen Mary University of London told Al Jazeera that the US has somewhat remained unaffected by the volatility in oil and gas markets, given their oil reserves and use of alternative sources of energy. Contrarily, the inflation in the eurozone area (EA) has been on an upward trend due to the Russo-Ukrainian conflict, adding that the EA inflation averaged 8.6% in June with 14 countries experiencing above-average inflation and only five maintaining a below-average rate. This was inevitable as the European Union imported roughly 40% of its gas through Russian pipelines. Germany has been one of the hardest hit economies, experiencing its first trade deficit since 1991 as a result of high fuel import prices. Because of these reasons, the euro depreciated against the relatively war-immune US dollar.

The second reason advanced by Lucio Sarno, professor of finance at the University of Cambridge, was that, in addition to the strong demand for dollars fueled by its safe haven status during wartime, rising interest rates in the United States are attracting more investment in dollar assets. The announcement by the Federal Reserve to begin a series of notable interest rate hikes alone caused the dollar to strengthen, while the euro lost another 10% of its value. The FED raised the interest rate to 0.75% in June, which is unmatched by the likely 0.25% raise ECB will apply.

Furthermore, the solution to the euro’s depreciation—raising interest rates—could exacerbate the EA’s already slow economic growth. According to Mallik, the only potential upside of a weak euro is a possible surge in demand due to the exchange rate, which could improve the export competitiveness of some European countries.