The euro at par with the dollar: a first since 2002, but what consequences can be drawn from it?

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published on Saturday, July 16, 2022 at 07:00

The European currency reached equilibrium with the dollar on Tuesday, July 12. This is the first time this has happened in twenty years.

But why this parity and what effects can this historical parity produce? Here are some answers.

The euro is trading at par with the dollar on Tuesday, July 12. This is the first since 2002. Last spring, however, it was worth about $1.2. The euro thus lost 13.2% in one year. This depreciation worries the markets and investors, who favored the greenback, considered a safe haven. In fact, the dollar has gained 14% since the beginning of the year.

Effects on the increase in prices and the purchasing power of households

According to data from Eurostat, the European statistics office, almost half of the products that arrive in the euro zone (19 countries) are invoiced in dollars, against less than 40% in euros. These are in particular certain raw materials, such as oil or gas, whose prices have been rising since the start of the war in Ukraine, which began on February 24.

“Imported products lose competitiveness (…) and are therefore more expensive,” Isabelle Méjean, a professor at Sciences Po, told AFP. This means that if the euro depreciates, then we must more European currency to buy imported products in dollars. Consequence: This leads to an acceleration of inflation and thus threatens the purchasing power of households.

in another record, a depreciated euro against the dollar will slow “tourism by Europeans, especially in the United States,” William De Vijlder, an economist at BNP Paribas, told AFP. As travelers need more euros to pay the same amount in dollars, the bill for their stay increases both in the United States and in countries whose currencies are pegged to the dollar, such as Qatar or Jordan.

In the opposite direction, American, Qatari or Jordanian tourists are winners. During their passage through the euro zone, they can consume more with the same number of dollars in their possession.

For companies, variable effects

The effect of the fall of the euro against the dollar it varies according to the dependency of the companies in terms of foreign trade and energy. For companies that export outside the euro zone, “they benefit from the depreciation of the euro because their prices are more competitive once converted into dollars.” On the other hand, “companies that import are penalized,” Philippe Mutricy, director of studies at public bank Bpifrance, told AFP.

These are the companies that are most dependent on raw materials and energy (and that export little) who are the most exposed and see their costs explode. However, there are industries that benefit from this euro/dollar parity by exporting their products. This refers the aeronautical, automotive, luxury and chemical industries.

What effects on growth and debt?

The depreciation of the euro does, in theory, more competitive prices outside the euro zone. Therefore, it stimulates exports of European goods and services abroad. This could cushion the impact on growth of the rise in commodity prices after the war in Ukraine, especially in countries such as Germany, whose economy is based on exports.

For the repayment of the debt of European countries, the effects are less noticeable. More growth can “facilitate the payment of the debt”, explained Isabelle Méjean to AFP. As long as markets view European debt as safe enough and interest rates remain low. On this subject, the Banque de France also estimated, at the end of last May, that the weakness of the euro could complicate the efforts of the European Central Bank (ECB) to control inflation.

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