The rising dollar increases the likelihood of parity with the euro

The 7% slide in the euro against the dollar this year is breathing new life into the two-decade-old question on Wall Street: Will the currencies finally reach parity this year?

The euro fell to about $ 1.035 earlier this month, down from the 13 1.137 level it closed last year. It ended at around $ 1.057 on Friday, holding it a little over 5% from reaching parity or parity.

The euro and the dollar last reached parity in late 2002, although in recent times Europe’s common currency has brushed off the threshold. Towards the end of 2016, after former President Donald Trump won the US presidential election and traders expected a series of interest rate hikes by the Federal Reserve, the focus shifted to euro parity. Those bets were unveiled in 2017 after the expected rapid growth in Europe

Some market observers say the prospect of equality is realistic this time around because traders are fighting the Fed, Russia’s war in Ukraine, its influence in Europe and the economic downturn in China. Many economists and investors expect higher fuel prices and supply disruptions due to the war to discourage growth in Europe. Any weak demand in China for European products could weigh heavily on the region.

Meanwhile, the Fed has launched an aggressive campaign to raise interest rates, further boosting the dollar, which has emerged as one of the main havens for investors this year. Higher interest rates generally support the dollar, making US assets more attractive to yield-seeking investors. The European Central Bank, meanwhile, is expected to lag behind the Fed in tightening monetary policy.

These factors have led to a strong start to the euro and the dollar this year – including Thursday, when the euro rose 1.2% against the dollar, the biggest jump in more than two months. The euro reversed some of those gains on Friday, when it fell 0.2%.

Nevertheless, the euro is having its worst start since 2015, according to Dow Jones market data. This has forced some analysts and investors to revise their expectations for equity in recent weeks.

“It simply came to our notice then [the euro and dollar] At the beginning of the war in Ukraine, the balance of payments has dropped from 30% to 75%, “said Viraj Patel, a global macro strategist at Wanda Research. “There is very little that small ECB rate arrests can do [euro’s] Rejection. ”

The euro and the dollar last reached parity in late 2002.


Photo:

Shahzaib Akbar / Shutterstock

Considered as a psychological level for currency pairing, the Euro-dollar parity also has significant implications for the local economy and consumer wallets. For Americans traveling abroad this summer, a weaker euro means their dollars could go further.

For the European economy, a weaker euro makes imports more expensive, which could create higher local prices. This could put further strain on the economy at a time when European countries — and the rest of the world — are already grappling with rising inflation.

“Broadly speaking, a weaker currency has the effect of accelerating inflation,” said Jane Foley, head of Rabobank’s foreign-exchange strategy. But, he noted, “this is not necessarily a level playing field [at which the currencies are trading] That makes things harder. It’s the uncertainty and instability – the pace at which we’re moving – that makes it difficult for policymakers to try to determine things like inflation. “

A weaker euro could also make euro-defined assets যেমন such as stocks কম less attractive. The benchmark Stoxx Europe 600 index fell 12% this year, less than the 18% fall in the S&P 500. But in dollar terms, it goes head-to-head with the US index.

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Do you expect the euro and the dollar to reach parity this year? Why or why not?

Investor tremors are evident elsewhere: earlier this month, the gap between the yields of Italian and German benchmark government bonds widened to 2.007 percentage points, the highest level since May 2020, according to TradeWeb. On Friday, that spread rose again above 2 percentage points. A wide gap between Italian and German yields is commonly seen as a barometer of financial pressure in this region.

Not all market observers are convinced that euro-dollar parity is possible. The currency still falls below what is considered a key technical level for the euro – the 0 1.034 intraday level that fell at the beginning of Euro 2017.

“It has some technical psychology,” said Paul Siana, head of Bank of America’s FX technical strategy.,

Note that the euro bounced higher last week after falling to an intraday low of around $ 1.035. However, he noted, “Maybe this time [parity] In fact, it is worse then worthless, it consumes time and resources but returns no sales.

Recent data from the Commodity Futures Trading Commission shows that leveraged funds held a decent net short position against the euro as of last week, but less bearish against the currency than last year’s point.

“The first thing that came to my mind when I was looking at the euro position was, ‘Oh, it has to go further,'” said Mrs. Foley, who has forecast $ 1.03 for the euro in the coming months.

“I think if we move into an environment where you are creating these risks for the eurozone – mainly because of energy security but because of the recession in China – there is a possibility that dead hard bulls will leave,” he said.

In 2021 the US dollar saw its biggest increase in value since 2015. This is good for many American consumers, but it can also hurt stocks and the US economy. Image courtesy: Sebastian Vega / WSJ

Write to Caitlin McCabe at [email protected]

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