This year the euro celebrates its 20th anniversary. An event that stimulated much reflection on the achievements and challenges related to the single currency principle in the euro area. Most of this analysis has rightly focused on the economic performance of this single currency zone. After all, the main goal of this monetary union was to maximize the benefits of the functioning of the EU internal market and thus put Europe on a stronger dynamism, especially in terms of economic growth.
Forex: definition and reaction
First, let’s recall that the Forex, also known as the foreign exchange market, is defined as a network of buyers and sellers who transfer currencies between them at an agreed price.
In fact, things seem very chaotic at the moment, especially in the foreign exchange (forex) market where the euro is practically par with the dollar. Although the euro is the second most used currency by most criteria, it often faces stiff competition from the dollar. This has both positive and negative effects on various parties.
The euro exchange rate has been falling for months and is now at the level of the US dollar. A year ago, one euro cost $1.20, by early 2022 it had already fallen to $1.13. Since then, the depreciation has continued, peaking with a short band against the US dollar in mid-July before falling below the $1 mark a few days later.
Experts cite two main reasons for the depreciation of the euro, on the one hand the meteoric rise in inflation in the euro zone and on the other hand the economic instability in Europe, triggered by the onset of shortages and the monopolization of raw materials such as gas.
Benefits of the single currency of the euro zone
The circulation of the euro in the euro economic zone makes it unnecessary to buy or sell currency for trade between the 19 countries, and the transactional contracts between the countries are not subject to uncertainties about future exchange rates. This promotes intra-European trade and also motivates consumers to buy products from the euro zone.
What does the euro-dollar parity mean?
This means that the European and American currencies have the same value. In fact, a currency’s exchange rate can indicate economic prospects, and those in Europe have faded.
The eurozone had high hopes for an economic recovery from the COVID-19 pandemic. However, this glimmer of hope was replaced by fears and declarations of a recession.
Rising energy prices and exceptional inflation are the main causes. You should know that Europe is much more dependent on Russian oil and natural gas than the United States, this puts this economic zone in a situation of weakness, so it will have difficulties in operating industry and energy production, which is already the case in some countries like Germany.
Fears that the war in Ukraine will result in a loss of Russian oil on world markets have pushed up oil prices. Then Russia halted natural gas supplies to the European Union in what European leaders described as retaliation for subsidies and arms supplies to Ukraine. This restriction or reduction in gas supplies hit Germany hard in the first place. That’s why European Union energy ministers met and agreed to cut gas consumption to help Germany and cushion the blow in the event of a shortage.
Impact on international trade
The European territory has a population slightly larger than that of the United States and a GDP slightly lower than the United States gross domestic product. The two regions are therefore of comparable size economically, but the United States has a much larger geographic area and therefore a much lower population density.
Implications and possible outcomes of parity
- This equality of values will affect multiple companies and countries. In particular, this situation is more profitable for American citizens. In fact, American tourists will pay much less than usual for their vacation (in the eurozone), thanks to what they see as cheaper bills.
- In addition, a weaker euro could make export products of European origin more price-competitive in the USA. Since the United States and the EU are important trading partners, it is important to monitor fluctuations in the exchange rate.
- In the United States, a stronger dollar means lower prices for imported goods, and conversely, EU countries could reduce the number of products imported from the United States and encourage consumption of local and European products.
- This parity will make US-made products more expensive in foreign markets, widening the trade deficit and reducing economic output while giving foreign products a price advantage on US territory.
Finally, a devalued euro can be a real dilemma for the European Central Bank and also in the foreign exchange market, since it can lead to higher prices for imported products, especially oil, which is valued in dollars. The ECB is already being tugged in various directions and is poised to raise interest rates, the typical anti-inflation cure, but higher interest rates can also slow economic growth.
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