The value of the euro exchange rate fell to par with the dollar (one to one) on Tuesday, for the first time since nearly 20 years.
The euro has been under pressure in financial markets for some time due to the effects of the Ukraine war, which affected Europe in particular, and the relatively conservative fight against inflation by the European Central Bank (ECB).
After reaching the level of parity with the dollar in the middle of yesterday’s trading, the ECB set the benchmark rate for the euro – which is determined according to the performance of the main players in the exchange markets – at between one euro and 1.0042 euros per dollar.
The weakness of the Euro came at a disadvantage in the current environment of relatively high inflation rates. The lower the exchange rate of the single European currency, the stronger other currencies, such as the dollar, will become, and then the value of goods coming into the eurozone will rise, which will exacerbate inflation.
With the depreciation of the single European currency, consumers in the eurozone will be forced to increase their expenditures in order to cover the cost of living and this decline, in the first place, heralds the occurrence of further rises in the prices of energy and raw materials.
But why is the euro sinking?
Europe is suffering the most from this war and is likely to lead to a prolonged and deep recession. This puts the ECB in a difficult place, trying to curb inflation and mitigate the slowdown in the financial system, as it aims to raise borrowing rates for the first time since 2011.
Meanwhile, the US Federal Reserve is raising interest rates and faster than what is happening in the eurozone. This makes the yields on US Treasuries greater than the yields on European debt, which is driving traders to the US currency and away from the Euro. What’s more, the dollar is taking advantage of its haven status, which means that as the battle continues and the fallout worsens, the euro continues to slide, according to Bloomberg.
Analysts expect the recurring exchange rate of the euro to fall to 90 US cents if Russia escalates by withholding additional gasoline supplies to Europe.
