The dollar bill and the euro one are worth almost exactly the same, for the first time in 20 years. The euro has traded against the dollar since 2002, but according to valuation sources follow By Bloomberg, on Wednesday, the euro, used by 19 countries, briefly dipped below the dollar, hitting a low of $0.9998 before rebounding to $1.003 in afternoon trade in London. The dollar has appreciated against a range of currencies while the euro has depreciated, especially against the dollar.
This is great news for Americans traveling to Paris because their dollars will buy more; that’s bad for the Parisians who are going in the other direction. That’s good for European exporters because they get more euros for every dollar of goods they sell in the United States; it is difficult for American companies to export to Europe or to compete with imports from Europe.
You may be wondering why the dollar is so strong despite high inflation and a possible recession. (Department of Labor Statistics report on Wednesday, consumer prices rose 9.1% in the year to June, the biggest 12-month change since November 1981.) High inflation, after all, tends to erode prices. value of money. And recessions make a currency less attractive by reducing the returns investors can expect from their investments.
Explanation? All are relative. The US has inflation, but so does Europe. The difference is that the US has higher interest rates, and the expectation that they will go higher in the coming months. International investors are willing to pay more for dollars to earn higher returns on the US currency market.
The European Central Bank could protect the value of the euro by raising interest rates as the Federal Reserve did, but it dares not because the eurozone economy is more fragile. That’s partly because the war in Ukraine, is affecting more Europeans than Americans. Energy costs in Europe have risen. The euro’s latest drop occurred due to the maintenance shutdown of the Nord Stream 1 pipeline, which supplies natural gas from Russia to Western Europe. Some Europeans fear that Russia will keep the pipeline closed sanctions Europe for backing Ukraine.
The dollar is also benefiting from investors’ knee-jerk reaction to putting their money in dollar-denominated assets whenever the going gets tough, considering the US as a safe haven. “Risk aversion and safe-haven dynamics are the driving forces” of the dollar’s value right now, George Saravelos, global head of forex research at Deutsche Bank in London, told me.
While a cheaper currency would theoretically help balance the economy’s trade, that hasn’t been the case recently for the eurozone, which is currently operating. trade deficic. Germany in May posted for the first time monthly trade deficit since 1991, a year after the country’s reunification. German exports are weak and prices of imports, including energy, have risen sharply.
For Germany, parity between the dollar and the euro “couldn’t have come at a worse time,” Susanne Mundschenk, founder and director of news and analytics service Eurointelligence, wrote in an email. . “Price parity means imports become more expensive, driving up inflation further without solving any problems in the supply chain.”
For the US Federal Reserve, the appreciation of the dollar is generally good. It helps the bank achieve its goal of cooling down inflation because a stronger currency lowers the price of imports.
One financial theory holds that when interest rates are higher in the United States, you should expect the dollar to depreciate in the coming months. Otherwise, investing in dollars will be a free lunch. But that condition, called insured interest parity, not always keep in times of international financial difficulty.
Another way to tell if a currency is relatively priced is to compare its purchasing power with the purchasing power of other currencies. An item such as a pound of copper should be equally expensive in all currencies, or someone else can make a guaranteed profit by buying it cheap and selling it expensive. In practice, purchasing power parity is not exactly kept, but it also cannot be violated too much for too long. According to purchasing power estimates by the Organization for Economic Co-operation and Development, “the dollar has not been overvalued against the euro, pound and yen for at least 30 years,” said Marc Chandler, chief executive officer. of Bannockburn Global Forex, wrote in an email.
Therefore, it is possible that we are seeing a bottom in the euro right now. Saravelos, first, predicts the euro will be back on the dollar by year-end if tensions in Ukraine ease or the Fed turns more dovish. That would be good news for a lot of Europeans.
Elsewhere: India overtakes China
India will become the most populous country in 2023, topping China, United Nations guess this week. The UN also said the world’s population is expected to “peak at around 10.4 billion in the 2080s and remain at that level until 2100.” It is predicted that more than half of the population growth by 2050 will be in eight countries: the Democratic Republic of the Congo, Egypt, Ethiopia, India, Nigeria, Pakistan, the Philippines and Tanzania.
Quote of the day
“Oh, I have three kids and no money. Why can’t I have kids and three money? “
– Homer Simpson
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