« Il est logique que le dollar américain soit le grand vainqueur de cette situation », affirme Ulrich Leuchtmann.

Sent July 11, 2022, 6:00 pmUpdated July 11, 2022 at 8:43 pm

The euro is about to be worth one dollar, the first since 2002. The single European currency has been undergoing a very brutal downward movement for several days, of the order of 13% in one year. This depreciation is accompanied by high inflation and slow growth. Returns in five points to a violent phenomenon that affects both businesses and individuals.

1. Why is the euro falling so drastically?

The fall of the single currency is the effect of multifactorial causes: inflation, fears of recession, the war on Europe’s doorstep.

The runaway inflation affecting the energy and commodities sectors is in fact accompanied by slow growth. The situation in Ukraine is proving to be the source of a number of economic threats. All of this raises concerns about the arrival of a recession. According to the PMI index published at the beginning of July, economic activity in the euro area slowed down sharply in June, reaching its lowest level in the last 16 months.

A concern which, in turn, fuels the drop in the price of the euro, while the dollar continues to rise, almost achieving parity with the single currency.

Because the dollar is stimulated by the monetary policy of the Fed, which in mid-June raised its reference rates by three quarters of a point, while the ECB, which is expected to start the movement in July, is lagging behind. In the eyes of investors, who are betting that the Fed will continue to raise rates, the dollar is strengthening in its role as a safe haven against the euro.

2. What are the historical highs and lows of the euro against the dollar?

The euro’s historic low, at $ 0.8230, was reached on October 26, 2000. The value is below its launch price in January 1999, in a context of recession in the early 2000s.

On July 15, 2008, the euro broke the $ 1.60 mark and reached its all-time high. This peak is mainly explained by a decline in the greenback, weighed down by the subprime mortgage crisis.

On 8 May 2014, the euro found its highest level since the end of October 2011, at $ 1.3993. The decision by the European Central Bank to leave the reference rate at a historically low level has a lot to do with it, while the economic recovery is confirmed in the euro area after the debt crisis.

On March 16, 2015, the euro fell to $ 1.06. This decline is the result of the ECB’s adoption of measures to support the economy in June 2014. Their introduction, with a further reduction in the reference rates, was aimed at depreciating the euro against other currencies to support European growth and achieve the inflation target set by the ECB.

In 2018, the return to growth in the euro area, and doubts about the US economy, caused the euro to soar against the dollar. On February 2, 2018, the euro reached $ 1.25.

At the beginning of 2020, the European currency was suffering from fears related to the spread of the coronavirus epidemic in China. On March 20, 2020, the euro fell to $ 1.07. Last step, the euro is worth this Monday, July 11, 1.0072 dollars: it is almost parity.

3. Who benefits from the fall?

A depreciation of the currency is generally stimulating for business: products sold in the currency in question gain competitiveness, exports are boosted.

The manufacturing industry is, in the euro zone, the main winner of this effect because it exports more. Among the most advantaged are the luxury and aeronautics sectors, which sell heavily in the dollar zone. Another privileged area, in France in particular, is the food industry.

The euro / dollar parity will also benefit the tourism sector with an increase in the purchasing power of American, Qatari and Jordanian citizens.

According to a study conducted by the consultancy MKG, the number of overnight stays by American tourists is particularly sensitive to the value of the two currencies. An advantage to qualify because according to Jean-François Rial, president of the Paris Convention and Visitors Bureau, “the return would have been the same with a stronger euro, especially since the increase is particularly visible in luxury hotels”.

4. Who Suffers?

The big losers are small businesses and non-exporting households, who see their purchasing power eroded.

For the vast majority of French and European economic operators, this depreciation of the euro is an aggravating circumstance. “Many flows between Europe and Asia are denominated in dollars, as well as for raw materials and electronic components, explains Emmanuel Arabian, Finance and Treasury Director of an industrial group and director of AFTE. This weakening will therefore weigh on imports “.

At the sector level, it is companies exposed to oil that are most affected by the depreciation of the single currency. While the price of the barrel has risen by around 46% in dollars since the beginning of 2022, its price in euros has increased by almost 60%. And while large corporate treasurers are used to hedging against foreign exchange risks, SMEs are often relatively poor.

Individuals are directly affected by their daily budget: average inflation in the euro zone reached 8.6% in June (and nearly 6% in France). There are two consequences, a loss of purchasing power and the beginning of a slowdown in food consumption, of 0.3% in May. Households also save on online sales and fuel. According to the general delegate of the Fédération du Commerce et de la Distribution, Jacques Creyssel, the French have already reduced the consumption of leisure products, clothing and hygiene.

Another negative consequence is tourism abroad, particularly in the dollar zone. Summer travel across the Atlantic has become a luxury.

5. What can monetary institutions do?

To control inflation, the European Central Bank has launched a move to raise its key rates. A difficult solution to manage, because if it acts too strongly on this lever, it risks penalizing growth, when it is already weak. The result could be catastrophic for some countries for which the debt would become too heavy to bear.

The European institution is in full consideration to successfully tackle this challenge, with limited room for maneuver. The project is both technical and political. Meanwhile, the global situation and the situation of the conflict in Ukraine are likely to weigh. In this context, any recovery of the euro must be seen “as a short-term rebound”, warns Fawad Razaqzada, an analyst at StoneX, who fears that, without major changes on the international front, the euro will continue to decline.

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