The euro is slipping to absolute equality with the dollar

Published April 29, 2022, 1:12 p.m.

Ahead of the presidential election, markets feared a sea wave that would overwhelm the euro. Prominent experts say that the European currency has fallen by 4% in the election of Marin Le Pen. He had to bounce back a bit in the event of Emmanuel Macron’s victory.

The explosion finally did not happen. On the contrary, after the re-election of the President of France, the fall of the European currency accelerated. It lost up to 3% this week, even below $ 1.05 on Thursday, and recovered slightly to almost 1.06 this Friday. The euro is getting closer to parity with the world’s leading currency. The level he did not reach 20 years.

Only in the first years of its existence, in particular from 2000 to 2002, it cost less than 1 dollar. On the first day of quotations in the markets on January 4, 1999, it reached $ 1.1747.

Access to weakness

The consensus of strategists and economists predicts an increase in the euro to 1.09-1.12 dollars this year. Of the 60 banks that have made forecasts for the euro against the dollar this year, only the Danish Jyske Bank forecasts the euro, close to a parity of $ 1.01.

However, new attacks of short-term weakness cannot be ruled out. “The movement of the dollar against other currencies is probably not over, but the ECB will probably be able to avoid the euro falling below parity,” – say market strategists UniCredit.

The strength of the dollar

This week, the dollar-weighted index (against a basket of major currencies) rose to its highest level in 20 years. The dollar takes advantage of profitability. The US Federal Reserve is determined to raise rates this year, and is expected to increase by 50 basis points next week. In an uncertain geopolitical environment, the dollar is also regaining safe haven status.

The European currency “could fall to a 2017 low of $ 1.0341 if the macroeconomic situation does not improve,” warns Dominique Banning, head of European currency research at HSBC. According to him, “consumer sentiment in Germany and France has fallen below the level reached in the midst of the pandemic in early 2020, and the European Central Bank is belatedly concerned about inflation at a time when growth prospects are deteriorating. ยป

Weak growth combined with rising prices will weigh on the euro. Before the war in Ukraine, it was about $ 1.13. It began its decline against the dollar, the economic consequences of the conflict were much greater for Europe than for the United States.

Competitive devaluation

The euro has recorded most of its decline against the dollar, against which it has lost more than 7% since the beginning of the year. Its world exchange rate decreases by only 2%. In particular, it is stable against the pound sterling and increases by 5% against the yen. This is 3.5% less against the yuan. Faced with the dollar, which is experiencing an overall improvement, the euro lost more than four months than in 2021 (-7%).

This decline is by definition conducive to European exports as it becomes cheaper in dollars. It probably wouldn’t have gone unanswered under the Republican US administration. Donald Trump, as we remember, accused Europe of devaluing the euro in order to restore competitiveness to the detriment of the United States.

The Biden administration is playing at peace, not immersed in the afterlife. It is watching closely for countries that would pursue a covert competitive devaluation that is detrimental to American interests. As a sign of this vigilance at the end of 2021, the US Treasury noted in its report on the exchange rate policy of the United States’ trading partners that Germany’s high trade balance with the United States “is not justified by economic principles.” It is clear that the eurozone’s largest economy at the time was already benefiting from the undervalued euro for its exports. With the further fall of the European currency this year, this criticism may well recover.

Nessim Ait-Kachimi with S.R.