If the euro were an airplane, all the alarm bells would ring. It has not been as low as it is now for twenty years. If the crash continues, it will soon reach parity against the dollar.
The European common currency was last worth one dollar at the beginning of December 2002. On Wednesday morning, it lurched around the $1.02 mark, two dollar cents below the previous day's rate. A year ago it was quoted at just over 1.18 dollars.
Experts no longer rule out the possibility that the euro could soon reach parity again. The euro hit its lowest point on July 5, 2001, when it was trading at $0.8380.
It's recession concerns that are causing the European common currency to plummet. Above all, the risk of a gas freeze is worrying the financial markets. Because that would stall the economy in Germany and Europe. “The situation is still good, but it is fragile,” said Ulrich Leuchtmann, Commerzbank's foreign exchange expert, on Deutschlandfunk.
Parity as an advantage?
A weak currency can also have advantages, it helps export companies. After all, domestic goods will be cheaper abroad, so sales will be boosted. At the same time, however, purchasing power is also exported abroad, which German and European warns can buy more cheaply.
In any case, an advantage for local export companies only exists as long as German entrepreneurs manufacture their goods entirely in Germany or in the euro area and then export them, says Sonja Marten, foreign exchange expert at DZ-Bank: “As soon as they purchase primary products from non-EU countries or those that are produced with a lot of energy, this calculation no longer works,” she says, pointing out that energy products in particular are billed in dollars.
Inflation also puts pressure on the euro
The rising energy prices were a major reason why Germany's foreign trade balance was negative in June for the first time in many years, meaning that more value was imported – including oil and gas – than exported.
The high import prices especially for energy are also giving a boost to inflation. And that cannot please the ECB. After all, it wants to counteract the strong inflation with the planned interest rate hikes.
At the same time, however, she does not want to do so too quickly because she then runs the risk of stalling the economy. “You could try to intervene verbally first,” Marten suspects. But experience has shown that it then tends to attract speculators who could push the euro exchange rate down again within a few days. But the downward movement of the last few days is unusual: “It shows how nervous the markets are,” says Marten. It therefore does not rule out parity or a short-term valuation below this mark.
The experts on both sides of the Atlantic are still arguing whether the dollar is overvalued or the euro undervalued
Transatlantic fear of recession
The fact that the euro is so weak against the dollar always has something to do with it to do with the assessment of the American currency. “The American Federal Reserve is setting the pace again,” explains former Allianz chief economist Michael Heise. It is taking action against inflation and has already started raising interest rates.
That had at times scared stockbrokers, who at the time feared a recession for the USA, says Marten. But now look at Europe: If the US economy collapses, the recession will also hit Europe.
The euro is undervalued
But the financial markets are now anticipating a more cautious one The Fed's pace, observes Michael Heise, who is now chief economist at HQ Trust. If the ECB actually takes the first interest rate hike in July and then others follow, maybe even raising interest rates a little more than previously thought, then he believes that could help the euro exchange rate again. Then the euro could soon be quoted again at 1.10 dollars or even more. He currently considers the purchasing power of the dollar to be overvalued anyway.
The markets are also so nervous because of the uncertainty. So if the gas from Russia should continue to flow, then that should also help the euro, hopes Ulrich Leuchtmann from Commerzbank. “In any case, such a low euro exchange rate is not justified.”