The Euro reaches parity with the US Dollar for the first time in 20 years

Take a look: 1 euro = 1 dollar.

With the war on the eurozone borders, the Uncertain energy supply from Russia And the risk of a recession increased, pressures on the euro finally grew so strong that on Wednesday it fell to parity with the US dollar – a one-to-one exchange rate.

It is a sight unseen since December 2002, in the early years of the coin’s existence. The aesthetically pleasing round number has become a focal point for investors.

In the foreign exchange markets, “1.00 is probably the biggest psychological level around,” analysts at Dutch bank ING said in a note to clients.

More important than a breakout of this level is how quickly the Euro drops against the Dollar. The currency, which is shared by 19 European countries, has fallen more than 11 percent this year, as the dollar’s strength has been almost unparalleled.

The sharp drop in the euro came with the appreciation of the dollar, one of the safest places to raise money, against almost every major currency in the world.

Currencies move like stocks, bonds, or any other asset – investors can buy them directly when they think they will grow in value, and sell them when they think they will fall. They also reflect global demand for state assets in general, because buying US government bonds or Apple shares requires getting the dollars first, and much of the global trade is done in dollars. So, as often happens in times of economic distress, people looking for a safe place to put their money buy more dollars, at the expense of other currencies such as the Euro.

The euro was introduced in 1999 after decades of discussion and planning, with the aim of bringing unity, prosperity and stability to the continent. After two major wars in the first half of the twentieth century, the argument in favor of the euro and the broader European project was that joint institutions would reduce the risks of war and crisis and provide diplomatic arenas for conflict resolution. The euro was a crucial symbol of this unity.

But like all currencies, the euro is no match for the strength of people’s faith in it. This was seriously tested about a decade ago when investors fled heavily indebted nations and bailouts led to battles over fiscal policy. The crisis threatened the currency’s future, but faith has largely returned. The eurozone, which started with 11 countries, is set to welcome its 20th member next year.

Despite this, in recent months, a slew of factors have rallied against the euro and in favor of the US dollar, which has reasserted itself as a haven during the economic turmoil.

Globally, supply chains have been disrupted by the pandemic and the war in Ukraine. Since the Russian invasion in February, the prices of basic commodities including oil, natural gas, wheat and fertilizers have soared, driving up food and energy prices around the world. which has led to the highest rates of inflation in decades.

Currently Central banks of the United States and Europe committed To reduce inflation through higher interest rates, even as the global economic outlook deteriorates. The risk of recession has been exacerbated by restrictions on Chinese production due to Covid-19 rules, while efforts to wean Europe off Russian energy have proven difficult to achieve. These trends made the dollar stronger while doing little to help the euro.

“The outlook remains very supportive of the dollar,” said Ibrahim Rahbari, global head of FX analysis at Citi.

The drop in the Euro has amplified fears of the Eurozone entering a recession.

Last week, uncertainty over the future of energy supplies in Europe and growing fears that Russia could permanently shut down a natural gas pipeline to Germany. Pushing the euro to a 20-year low.

But the bets on parity began to pile up months ago. Since April, Jordan Rochester, a strategist at Japanese bank Nomura, has been betting that the euro will reach parity with the dollar. Similar predictions followedincluding at JPMorgan Chase and HSBC.

Then came a short respite in the euro’s fall. Among other things, the President of the European Central Bank, Christine Lagarde, laid out a clear plan for Raised interest rates for the first time in more than a decade in July He noted that the eight-year period of negative interest rates will end by early fall. Since then, policymakers have beefed up their commitment, saying that when rates rise again in September, the jump will likely be larger than in July.

In the end, it wasn’t enough to change the currency’s course. “It’s hard to find much positive to say” about the euro, HSBC analysts wrote in a note to clients in early July. ‘Economic news is very difficult.’

Around the same time, Nomura’s Mr. Rochester said he expected the euro to reach parity with the dollar by the end of August. In the end, it happened more quickly.

“It’s pretty much human psychology,” said Mr. Rochester. He added that there was no market-based reason for parity to matter – “it’s just an approximation.” But it may be the beginning of a period similar to the currency’s early years, when trading ranged between 82 US cents and 1 dollar per euro.

At that time in the early 2000s, before the euro appeared in the form of banknotes and coins and was just a virtual currency, the depreciation of the exchange rate undermined confidence in the new currency. Even the European Central Bank stepped in to try to support it.

Today, there are fewer questions about the euro’s resilience as progress has been made in solidifying the union. The central bank’s decade-old commitment to preserving the currency has not been significantly tested since.

But a weaker currency is an additional headache for the ECB, as it will add to the region inflationary pressures By increasing the cost of imports. Central bankers say they are not targeting the exchange rate level, but that it will be difficult for them to stop the currency’s decline with words because the forces pushing the dollar up have been too strong.

With inflation in the United States approaching its highest rate in four decades, the Federal Reserve reinforced monetary tightening with large increases in interest rates. Jerome H. Powell, Federal Reserve Chairman, said at a conference in late June that he expects the benchmark interest rate to reach 3.5 percent this year. He added that there was a risk that the central bank would go too far in raising interest rates to calm the US economy, but leaving inflation high was an even greater risk.

As Mr. Powell spoke, he sat next to Ms. Lagarde at the European Central Bank’s annual retreat in Sintra, Portugal. While she agreed with him about the risks of persistent inflation, she did not match his commitment and clarity about how high interest rates could go up in the eurozone. Investors can only speculate on what might happen until the end of the year.

But even before the first rate hike, on July 21, the growing risk of a recession in the eurozone made investors wonder how much higher the bank could raise before it had to stop again.

“The European Central Bank will struggle to keep pace with the Fed’s decisiveness in tackling inflation or raising interest rates,” said Rahbari, a Citi analyst.

While the European Central Bank plans to increase interest rates, it also has to keep an eye on the sovereign bond markets. There were concerns about The effect of higher interest rates And the end of the central bank bond-buying programs for the most indebted member states in the bloc.

In Italy, for example, borrowing costs rose sharply in June, and officials are trying to determine how much of these moves were a fair reflection of the risk of Italy’s financial situation and so-called fragmentation, or the rapid divergence of interest rates between the eurozone. Members that would make monetary policy less effective. the bank Preparing a new political tool To deal with this fragmentation, which central bankers see as a divider between economic fundamentals and government borrowing costs.

“It will be another test time for the eurozone” and its central bank over the next year, Rahbri said.