Euro Falls to Parity with the US Dollar for the First Time in 20 Years

July 12, 2022

Americans vacationing in Europe this summer are in for the most favorable currency exchange rate in decades. The euro, battered by surging inflation and recession fears, has fallen to parity with the U.S. dollar for the first time since 2002, and while this is good news for American travelers, it presents another major headache for the European Central Bank (ECB).

At the start of the year, 1 euro was worth about $1.15. It has since plunged nearly 12%, and today 1 euro is worth roughly $1. This is partly due to the dollar’s strength this year. Aggressive rate hikes from the Federal Reserve and global recession fears have sent investors flocking to the safety of the dollar. At the same time, fears are mounting that soaring European gas prices and slow growth will see the region fall into a recession, which makes the euro weaker.

A weaker currency raises the cost of imports, particularly for energy and other dollar-denominated commodities, which makes everything more expensive. ECB studies have shown that a 1% depreciation in the currency’s exchange rate raises inflation by 0.1% over a year and by up to 0.25% over three years.

The ECB has largely downplayed the issue thus far, claiming that it has no exchange rate target and noting that on a trade-weighted basis, the euro is down only 3.6%. Still, the euro’s weakness further complicates the ECB’s already difficult task. Inflation is surging at historic levels, but the region’s slowing economy and looming energy crisis mean the ECB may not be able to adequately tighten policy enough to tamp down inflation.

Analysts expect that the euro may still drop further, with some forecasting that soon 1 euro may be worth $0.95.

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