On 12 July, the euro fell to a value of $0.9998, its weakest value in 20 years, as the Eurozone’s economy was battered by record inflation, energy shortages, record-high fuel prices, and the threat of a global economic slowdown.
The euro closed at $1.01 on 18 July.
On the same day, the U.S. dollar booked a value of $108.56 against an assortment of major currencies, its priciest since October 2002.
The euro’s plunge revived memories of its infancy, when it was referred to as a “toilet currency” and Europe’s central banks intervened to prop up its value until it was more widely accepted.
The gap between the euro and dollar has widened, in part, because Europe is more fully exposed to the impact of Russia’s war in Ukraine. The war has cost it fuel, food, and manufactured goods as well as having flooded it with Ukrainian refugees needing food, shelter, and care.
While down 11 percent against the buck this year, the euro has fared better against other trading partners’ currencies, losing an average of only 1.6 percent so far in 2022.
Still, the Eurozone imports more from the U.S. than any other country except China, so the euro’s plunge against the greenback will raise a range of consumer prices across the continent.
The euro also makes up about 20 percent of the world’s foreign currency reserves and the Eurozone has issued a quarter of sovereign bonds, CNBC said.
The euro’s weakness has been a factor in Europe’s 8.6-percent inflation in June, CNBC noted.
For every 10 percent the euro loses to the dollar, Europe’s inflation rate over the next year grows by 0.2 percent, Schumacher calculated.
The weak euro, sliding at a time when energy prices are rocketing up, raises the region’s odds of a recession. Most oil and natural gas imports must be paid for with dollars.
If current conditions persist in the energy and currency markets, the Eurozone’s trade balance could drop by €400 billion this year, Deutsche Bank warned.
“If the change in the energy mix facing the European Union changes its competitiveness, that could mean the euro [continues] to come down,” Maria Demertzis, co-director of Bruegel, a Belgian think tank, said in comments quoted by the Financial Times.
“That’s one to watch,” she added.
TREND FORECAST: This is not rocket science. European inflation is running at 8.6 percent and the ECB has not raised interest rates since 2014.
Go back to January of this year… It is not ancient history. Listen to the either stupidity or lying by the ECB Central Bankster Christine Lagarde once again rejecting calls for the bank to raise its base interest rate from its current -0.50 percent, where it has remained for eight years. (See “ECB: More Monetary Methadone,” 27 Apr 2021 and “ECB Pledges to Keep Rates Lower Longer,” 27 Jul 2021, among other articles.)
Pressure had been growing on the bank to boost rates, with Europe’s inflation back then running at a multi-decade high of 5 percent. Under inflation pressure, Norway and the U.K., had pushed their rates higher (See “Norway Becomes First ‘Group of 10’ Countries to Raise Interest Rates” (28 Sep 2021) and “European Markets: Higher Rates Impact” 21 Dec 2021).
Thus the dollar has, and will continue to attract investors away from the euro as the U.S. Federal Reserve continues to raise interest rates while the European Central Bank may just jack them up to zero at best. Indeed, with inflation at 8.6 percent raising rates to zero brings the real interest rate to -8.6 percent.