The Euro Is Nearing Parity with The Dollar

For the first time in 20 years, the euro is approaching parity with the US dollar. Still, currency gurus are divided on whether it will reach that level and what it will mean for investors and the economy.

The euro was hovering around $1.05 as of Thursday morning in Europe; it fell steadily for nearly a year, from approximately $1.22 in June. Earlier this week, the common currency fell to slightly around $1.03.

Concerns about Russia’s war in Ukraine, increasing inflation, supply chain issues, a slowing economy, and tightening monetary policy have pushed investors toward conventional ” haven” assets; strengthening the dollar.

Divergence in monetary policy among central banks has also contributed to narrowing the two currencies. The Federal Reserve of the United States boosted benchmark borrowing rates by half a percentage point earlier this month; this was its second hike of 2022, as it seeks to rein in inflation, which is at a 40-year high. In contrast to the Fed and the Bank of England, the European Central Bank has yet to hike interest rates despite record-high inflation across the eurozone.

The dollar index was up approximately 8% since the beginning of the year. Deutsche Bank said in a report Tuesday that the ” haven” risk premium built into the greenback is now at the “high end of extremes.

George Saravelos, Global Co-Head of FX Research at Deutsche Bank, feels a tipping point is near. He stated that additional worsening in financial circumstances “undermines Fed tightening expectation”. In contrast, there needs more tightening for the rest of the globe, mainly Europe.

The European Union’s executive said this week that member countries could continue to buy Russian gas without violating sanctions imposed on Russia following its invasion of Ukraine. Still, they should avoid opening rouble bank accounts.