The currency loses parity with the dollar again due to the decoupling in the economic perspectives between Europe and the US
The drums of recession in the eurozone are once again beating loudly, hitting the euro with particular intensity, repeating this Tuesday in its crossing with the dollar. The single currency is biding farewell to parity at $0.9921, renewing its 20-year low and showing that investors are no longer fleeing the currency just because of the difference in the pace of interest rate hikes between the US and the eurozone, slower in tightening monetary policy.
Leaving aside the gap between the central banks of both regions, the major problem the market perceives is rather the decoupling in the economic perspective, with a eurozone much more dependent on energy and therefore suffering much more from the energy shock that results. of the war in Ukraine.
Chaos that this Tuesday led to European gas futures, which are traded on the Dutch platform TTF, above 295 euros per megawatt hour (MWh), the highest level since the record 345 euros/MWh in March.
The European Union’s massive reliance on energy has led to a series of crises of confidence among investors in the region, leading to the loss of parity between the euro and the dollar, which, as Gabriel Debach, market analyst at eToro, reminds us: it had been seen so continuously since the dotcom crash, when the exchange rate hit record lows of $0.82.
“The new energy pressure is keeping the single currency in suspense. Consider that in just over a month, from July 14 to today, TTF prices have risen by more than 213%,” he says. “This situation has serious consequences for European economies, especially for Germany.” not only for the impact of the rise in energy on inflation, but also for the knock-on effect it generates in activity, with consumers cutting back on other items to cope with the rise in energy bills or companies being forced to investors in the face of declining activity.
The weakness of the euro is a sign of that fear. And this situation has its face and its crotch. But overall it hurts more than benefits European households, who lose their purchasing power due to the fall of the currency.
One of the main drawbacks of the weak euro is that it is also more expensive for the region to buy products in other currencies. And among them stand out the import of energy and other commodities such as minerals, cocoa, grains… all denominated in dollars. And with that, the manufacture -and subsequent sale- of products based on these materials also becomes more expensive.
Imported oil and gas therefore become more expensive due to the exchange rate. And that could put even more pressure on inflation, which was already rampant in July in the eurozone at 9.8% (10.8% in Spain).
“A weak euro is inflationary because everything we buy abroad is more expensive,” emphasizes Víctor Alvargonzález, director of strategy and founder of the independent consultancy Nextep Finance. “And beyond that we buy energy and raw materials, which right now in the midst of an energy crisis, having a weak euro is the worst thing that could happen to the European economy because, I insist, we import inflation just when we need it. least need,” he says.
A situation that is particularly worrying for major energy importers such as Spain. According to data from the tax authorities, energy products represented 22.2% of total imports into the country in April (latest available data). In other words, it’s the products we import the most, before capital goods and chemical products.
So, without going further, another major victim of a weak euro is the ECB itself, which, in order to defend the currency against the strength of the dollar, would have to accelerate interest rate hikes, complicating its plans to normalize the pace. of monetary policy.
“If we didn’t have the serious inflation problem that we have in Europe and especially in Spain, a weak euro wouldn’t be so serious, because it helps to sell better abroad, because our products are more competitive in price when our currency is devalued ”, explains Alvargonzález.
eToro analysts also point out that corporate giants such as Airbus or ASM are the biggest beneficiaries of this situation, recalling that “more than 50% of European business sales come from abroad, compared to just 30% of US companies”
However, in a recent analysis, José Manuel Villamor, director of Weather Management at A&G, believes that “the energy shortage will cause exports to grow fundamentally less than imports.” In other words, the improvement in the ultimate competitive position that can be achieved vis-à-vis external partners selling in dollars with the ‘devaluation’ of the euro will not be so important in the evolution of the final balance of trade.
One of the major beneficiaries of the euro’s weakness is undoubtedly tourism, one of the economic engines of countries such as Spain. For travelers from the US, for example, the eurozone is now much more attractive than before, as they can buy many more things with each of their dollars than before. Something that in turn benefits leisure, restaurants, commerce, etc.
The downside is for Eurozone travelers who want to go to the US because they have less purchasing power (they give you fewer dollars for each of your euros).
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
