The U.S. dollar and the euro reached a one-to-one exchange rate Wednesday, parity for the two currencies that hasn’t occurred since December 2002.
The euro, which briefly dipped below the U.S. dollar Wednesday morning following the U.S. Bureau of Labor Statistics’ 9.1% Consumer Price Index report, has been losing strength since January as Europe contends with the fallout from the Russia-Ukraine war, growing recession fears, and a tentative energy situation with Moscow, analysts said.
The matching value of the two currencies or a dip below parity can be a psychological level for investors. In foreign-exchange markets, “1.00 is probably the biggest psychological level around,” analysts at the Dutch bank ING said in a note to clients.
Higher import costs caused by the sinking value of the euro, which has fallen 11.5% from $1.13 at the start of the year, will likely prompt European central banks and policymakers to take concerns over inflation, high-interest rates, and a depreciating currency more seriously, analysts said.
“It’s becoming increasingly clear that the Eurozone is heading into recession, even as financial conditions have tightened more than in the U.S. or Japan,” tweeted Robin Brooks, chief economist at the Institute of International Finance.
For the first time in over a decade, European Central Bank President Christine Lagarde signaled an end to the era of negative interest rates with a plan to raise them in July.
Consequently, higher interest rates may challenge policymakers, keeping Europe afloat and recession prospects hanging on a thread. This is partly due to Europe’s economic consumption remaining at pre-pandemic levels, predicted analysts.
The euro’s year-long devaluation has created a risk-averse environment for investors who are pouring into “safe haven” assets like the U.S. dollar, typically one of the safest places for generations to park money. “The outlook remains very supportive for the dollar,” said Ebrahim Rahbari, the global head of foreign-exchange analysis at Citi.
A revised 2022 euro-zone growth forecast from The Economist Intelligence Unit downgraded Europe’s current-year growth from 4% to 2% and predicts a 1.6 percent growth rate for 2023.
Euro weakness reflects fear in investors who expect an impending recession, said EIU global forecasting director Agathe Demarais.
Ultimately, having strength behind the U.S. dollar is positive for Americans who might want to spend a holiday in Europe or those who purchase goods from abroad.