Euro falls below parity with the dollar

Euro below dollar parity
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Euro falls below parity with the dollar

The euro has fallen below parity with the dollar, diving to its lowest level in 20 years and ending a one-to-one exchange rate with the U.S. currency.

It’s a psychological barrier in the markets. But psychology is important, and the euro’s slide underlines the foreboding in the 19 European countries using the currency as they struggle with an energy crisis caused by Russia’s war in Ukraine.

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Here’s why the euro’s slide is happening and what impact it could have:

WHAT DOES EURO AND DOLLAR PARITY MEAN?

It means the European and American currencies are worth the same amount. While constantly changing, the euro has dropped just below a value of $1 this week.

A currency’s exchange rate can be a verdict on economic prospects, and Europe’s have been fading. Expectations that the economy would see a rebound after turning the corner from the COVID-19 pandemic have been replaced by recession predictions.

More than anything, high energy prices and record inflation are to blame. Europe is far more dependent on Russian oil and natural gas than the U.S. to keep industry humming and generate electricity. Fears that the war in Ukraine will lead to a loss of Russian oil on global markets have pushed oil prices higher. And Russia has been cutting back natural gas supplies to the European Union, which EU leaders described as retaliation for sanctions and weapons deliveries to Ukraine.

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Energy prices have driven euro-area inflation to a record 8.9% in July, making everything from groceries to utility bills more expensive. They also have raised fears about governments needing to ration natural gas to industries like steel, glassmaking and agriculture if Russia further reduces or shuts off the gas taps completely.

The sense of doom increased as Russia reduced the flows through the Nord Stream 1 pipeline to Germany to 20% of capacity and said it would shut it down for three days next week for “routine maintenance” at a compressor station.

Natural gas prices on Europe’s TTF benchmark have soared to record highs amid dwindling supplies, fears of further cutoffs and strong demand.

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“If you think Euro at parity is cheap, think again,” Robin Brooks, chief economist at the Institute of International Finance banking trade group, tweeted Monday. “German manufacturing lost access to cheap Russian energy & thus its competitive edge.”

Euro falls below parity with the dollar. What’s the impact?  The Associated Press – en Español

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