The value of the euro sunk to parity with the U.S. dollar, the lowest level for the European currency since 2002, on Tuesday.
The euro has declined by around 12 percent against the dollar this year as investors worry both over a recession in Europe and further inflation eroding the currencies value. As well, investors around the globe fear that Europe’s economy could be hurt significantly if Russia retaliates by cutting off the west from its energy supplies.
The U.S. dollar’s value has also likely been helped by the Fed’s hawkishness on interest rates. Higher yields for dollar-denominated assets, especially U.S. Treasuries, can raise the demand for dollars, pushing up their value against other currencies. Capital flows into the U.S.—and therefore into dollars—seeking those higher yields.
Even though inflation in the U.S. has been running at the fastest pace in four decades, price hikes are expected to level off over the next year as the economy slows and supply chain snarls are untangled. The ECB is seen as further behind the Fed when it comes to tackling inflation with higher rates.
The stronger dollar raises the price of U.S. versus foreign goods, discouraging exports and encouraging imports. This can further lower inflationary pressures in the economy, although it hurts U.S. exporters. On the other hand, the weaker euro could make inflation on the continent worse by making imported goods more expensive, including commodities like food and energy.
It’s likely that the euro will fall even further against the dollar this summer.
One question many Americans will ask is whether now is a good time to visit Europe. The answer is that it is—for now. Going to Europe looks a lot cheaper for Americans than it has been for years. The stronger dollar will offset the higher prices on hotels, eating out, and airfare.
A Christmas trip to Europe may not be a good idea, particularly if Russia cuts off access to natural gas that provides heat for many European countries. Winter is coming, as they say.
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