As the global economy continues to deal with a large variety of instability, the price of the euro has quickly been approaching parity with the U.S. dollar for the first time in close to two decades.
The euro was set up by the European Union as its official currency back in 1999. Over the past twenty years, exchange rates have been almost at or over $1.10 per euro through the foreign exchange market — which means that any American attempting to get euros would need to give more dollars per euro they get in exchange.
Over the course of the past year, however, the exchange rate has been seen dropping rapidly from where it started at $1.22 per euro all the way down to $1.02 per euro, as reported to Bloomberg Markets. The phenomenon implies that there are more favorable conditions for Americans attempting to carry out business in or travel to European countries that use the euro as their currency.
“We are partly observing a return to a longer run trend, which began in the summer of 2008, where the euro gradually depreciates against the dollar,” explained the director of the Sound Money Project at the American Institute for Economic Research, William Luther. “That trend was interrupted by the pandemic, with the euro appreciating considerably throughout much of 2020 before reversing course in January 2021 and returning to its pre-pandemic level by March 2022.”
The most recent crash in demand for the euro was most likely caused by the recent Russian full-scale invasion of Ukraine, which has ended up causing higher prices for natural gas and reduced its production all across Europe. “Barring any further calamities, the exchange rate will likely return to its pre-pandemic trajectory as Europe’s energy problem wanes,” stated Luther, who also works at Florida Atlantic University as an economics professor.
Quite a few countries have ended up getting half of their usual volumes of natural gas from Gazpom, a Russian state-backed company, as reported by Reuters. Uniper, a German gas importer, recently requested that the country’s government issued a $2 billion loan due to reduced energy supply from Russia, reported a state-run German news source, Deutsche Welle, this past Friday. Robert Habeck, the minister of the Economy, affirmed that the government “will not allow a systemically important company to go bankrupt and cause turbulence on the global energy market as a result.”
The increasing energy costs are making things much worse in regards to the battle against high inflation for the European Union and the United States. Due to inflationary pressures throughout Europe being more heavily driven by “real supply disturbances,” Luther stated that the increased price levels are “more excusable” overseas. Both European and American legislators, however, “have done little to counter rapidly rising prices” until quite recently, he stated.
“The European Central Bank cannot do much to increase the supply of natural gas. The situation is very different in America, where much of the inflation experienced over the last year was due to easy monetary policy,” express Luther. “The Federal Reserve could have — and should have — offset the surge in nominal spending observed over the last year. If it had, prices would be lower in the U.S. and in Europe today.”
The Federal Reserve’s benchmark interest rate is now set to be between 1.5% and 1.75%, but the European Central Bank is currently sporting a negative interest rate that many legislators hope to drag above 0% by as soon as September. Both central banks have far-reaching inflation goal of about 2%, despite inflation rates for both Europe and the United States sitting currently over 8%.