The dollar and the euro are almost equal: how will the turmoil in the currencies affect American wallets?

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After a slow decline in value over the past year, the euro (the common currency of the European Union) is now worth about as much as the US dollar. Valued at around $1.22 at the end of May 2021, the euro now sits at around $1, the lowest in two decades.

The drop in the price of the European currency could be a boon for American travelers financing their trips abroad with dollars, since their money now buys more compared to prices in euros. The change in the exchange rate will also have an impact on American companies: although imports into the United States are now cheaper, American companies exporting to Europe or competing with European imports could face more competition. harsh.

Why has the US dollar remained strong while the euro is losing value? Europe faces high inflation, as does the United States, but the European Union has yet to raise interest rates and is subject to other economic constraints, including war in ukraine.

Find out why the value of the Euro is falling and what that means for American travelers and shoppers.

What is the euro?

The euro (represented by the symbol “€”) is the currency of 19 of the 27 states of the European Union called the euro zone: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia , Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.

The EU introduced the euro as a digital currency in 1999 and started rolling out coins and paper money in 2002. According to the European Central Bank, more than 340 million Europeans use the euro.

With around €1.6 trillion in circulation as of June 2022, the euro is the world’s second largest reserve currency, behind the US dollar. After its introduction in 1999, the euro was worth less than the dollar for a few years, but has maintained a consistently higher value since 2003, peaking at nearly $1.60 during the summer of 2008.

Why is the euro losing value?

There are several factors at play here. For starters, inflation is hitting Europe hard, with an expected rate of 8.6% in June and no relief expected until the end of 2022.

Although this economic outlook bears a striking resemblance to what is happening in the United States, with inflation up 9.1% year-on-year as of June 2022, there are some stark differences.

Chart of the euro rate from 2018 to June 2022

The value of the euro plunged in 2022.

Federal Reserve Economic Data

The economic shocks of the war in Ukraine, particularly related to rise in gas and oil priceshit Europe harder than the United States and many experts are predicting a prolonged recession in Europe.

“Russia’s invasion of Ukraine is a seismic shock for the Eurozone, as much of the European growth model relies on cheap Russian energy. It’s over. Recession and structural headwinds are coming “said Robin Brooks, chief economist at the Institute of International Finance tweeted Thursday.

Additionally, the European Central Bank has yet to raise interest rates in 2022 (although it plans to raise them by 25 basis points in July) while the Federal Reserve has already raised rates three times. , with further aggressive rate hike expected this month.

The Fed’s decision to raise interest rates in the United States had an indirect impact on the value of the euro. As US interest rates rise, the value of interest-bearing accounts in the US also increases, making them more attractive to investors around the world.

As more and more investors convert euros into dollars to invest, the value of the euro declines. This has helped strengthen the US dollar throughout 2022, while weakening the euro. In fact, the Federal Reserve’s Real Broad Dollar Index – an inflation-adjusted valuation of the US dollar – is at its highest level since its inception in 2006.

What will be the impact of a weaker euro on Americans?

The United States is a major trading partner with Europe, and while the weaker euro should lead to price reductions on imports for American consumers, it will make American products more expensive for European consumers. A continued advantage of the dollar against the euro could lead to an increased trade imbalance and hurt the economic output of American businesses.

American companies and workers who operate in Europe and are paid in euros will also see their income reduced if they convert their European income back into dollars.

In the broader economic context, a recession in Europe, particularly one that involves gas and energy rationing, could lead to a global recession, which the World Bank recently warned of. In his June report on the global economic outlook, Chairman David Malpass noted that even “if a global recession is averted, the pain of stagflation could linger for several years – unless major increases in supply occur. be triggered”.

Will a weaker euro save Americans money when they travel to Europe?

It certainly makes dollar-to-euro conversion calculations much easier! A €250 train ticket will cost you around $250. (Last June, that same ticket would have cost you $305.)

A less valuable euro essentially means about a 15% reduction for Americans using dollars to buy things in Europe, compared to last summer. For example, in 2021, $100 would only get you around €82 worth of goods or services. Now those same hundred dollars can net you $100.

Reuters reported on Friday that “American tourists crowded Avenue Montaigne in Paris” for shopping due to the weak euro. He also noted that there had been a fourfold increase in tourism spending in Europe this year in June compared to 2021.

If you’re planning a trip to Europe, you’ll want to use a credit or debit card that does not change foreign transaction fees in order to get the most out of the discounted euro. Some cards will charge 3% to 5% for each transaction, reducing your conversion discount.

The bad news? Prices might be cheaper for Americans once they get to Europe, but flying there was difficult due to increased demand and an unprepared tourism industry rebounding from the COVID-19 pandemic. According to NPR, “passengers face chaotic scenes at airports, including long delays, canceled flights and headaches from lost baggage.”

How about buying European products online?

Any websites that use Euros as an accepted currency will essentially be cheaper for Americans converting dollars to make purchases, just like the currency conversion discount (from last summer) applies to goods and services purchased in person.

For customers in the United States, the weak Euro could also lower the prices of goods imported from Europe, whether you buy them in-store or online.

What’s next for the euro?

So far, the biggest impact of the euro’s decline could be psychological. The rise of the euro as a competitor to the dollar has been an important political project for the EU. On the occasion of its 20th anniversary, the President of the European Parliament, David Sassoli, described the euro as “a condition for protecting and relaunching the European economic, social and political model in the face of the transformations of our time”.

As its value plunges in 2022, the euro could lose the confidence of European investors, posing a longer-term challenge to the economic stability of the European Union.

For more information on the current state of the economy, read why inflation is so high in the USA, how to prepare for a recession and which states are sending new stimulus checks to residents.

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