DOLLAR EDGES TOWARD PARITY WITH EURO

With the dollar continuing to surge in value against other currencies and the euro down 7 percent so far this year, some analysts are beginning to speculate that this might be the year when the two reach a one-to-one value.

That happened last in 2002. 

The euro sank toward the dollar in 2016 but bounced back after Europe’s economy grew at a brisk pace the next year.

Now the euro has seen its worst start to a new year since 2015, according to Dow Jones Market Data.

We signaled the weakening euro in “Euro Hits 16-Month Low Against the Dollar” (23 Nov 2021) and “ECB Holds Interest Rate at -0.50 Percent” (26 Apr 2022), among other articles.

The euro closed last year worth $1.137 but dipped as low as $1.035 earlier this month. 

Now Europe is burdened by record inflation, soaring energy prices due in part to the Ukraine war and Western sanctions, shortages of key items, and a lack of goods from China to supply its factories.

China’s economic slowdown also is likely to reduce its demand for goods from Europe.

In addition, an already-weak euro makes the continent’s exports cheaper abroad, returning less value to manufacturers, further bogging down economic activity.

These factors will weigh on economic growth across the continent and increase the chance of a European recession. 

“Broadly speaking, a weaker currency has an impact on accelerating inflation,” Jane Foley, Rabobank’s chief foreign-exchange strategist, told the Wall Street Journal.

The euro closed 23 May at $1.07.

TREND FORECAST: The dollar will remain the world’s haven currency.

Even as the European Central Bank begins to raise interest rates out of negative territory, as it may put downward pressure on the dollar, it will be quickly passing. Europe will continue to be battered by surging energy prices as well as possible shortages of natural gas, manufactured components, and food staples, all of which will drive prices higher.

Meanwhile, rising interest rates in the U.S. and U.K. will pull investment out of the euro and into the dollar and pound.

China and the rest of the world will take months to recover from that nation’s almost two months of COVID-related shutdowns, which halted manufacturing as well as trade; more than 500 ships were idled outside Shanghai’s port as of 21 May.

Minus a wild card—such as Washington ramping up its proxy war with Russia into a face-to-face altercation—the U.S. is better positioned than Europe to weather this chaos. As a result, the dollar and euro will reach parity within the coming months.