The euro is nearing parity with the US dollar. This means the Euro and US dollar could be of the same value. The last time this occurred was 20 years ago in 2002. This was when the euro was in its infancy and only three years after it was introduced.
As of Thursday morning in Europe, the euro was hovering around $1.05. Its been in steady decline for almost a year.
There have been a few close calls in the past two decades. However, traders are betting that this is the year the two currencies cross paths due to a tumultuous macro environment.
What is causing this?
It’s a combination of multiple occurrences. Firstly, the US Federal Reserve’s move to aggressively tame inflation by raising the interest rates has strengthened the US dollar. Secondly, there is a potential energy crisis simmering in Europe due to the war in Ukraine. This crisis has caused the Euro to slip. Last but not least, stagflation concerns all over the world.
Investors are wary and the best place to seek shelter would be in the US Dollar.
But why the US Dollar and not the Euro?
The US dollar is the primary currency of choice during economic downturns and periods of uncertainty. Europe also seems more vulnerable to an economic downturn at the moment compared to the US.
What are the results we can expect?
One thing for sure is we can expect more American tourists in Europe this summer.
Inflation could get worse in other countries especially those in the region. After all, most of the world’s major commodities are priced in US dollars.
This isn’t just a US dollar vs Euro story. The whole world will very much be affected. The US dollar has gained more than 13% vs a basket of the world’s major currencies over the past year.
Eventually, this could spell trouble for US exports as they become too expensive for their buyers.
In conclusion, we expect a tumultuous 2022.