The euro and the dollar have reached parity for the primary time in 20 years, signalling the market’s assumption that the European economy is heading for a deep recession in consequence of Russia’s invasion of Ukraine.
Today, 1 EUR equals 1 USD.
The shift means European corporations and consumers pays more for the products and services they import, while European exports grow to be immediately cheaper in international markets.
The euro has experienced a dramatic loss of value since early February when it was value over $1.13.
The autumn accelerated in recent weeks as fear spread that Russia, the EU’s essential energy provider, was going to completely cut off gas flows in retaliation for Western sanctions.
To date, 12 EU countries have suffered a complete or partial reduction in Russian gas.
Supplies from the Nord Stream 1 pipeline stopped earlier this week for a planned 10-day maintenance. It’s unclear if the Kremlin will order the suspension to increase beyond that deadline and grow to be indefinite.
“Let’s prepare for a complete cut-off of Russian gas. That is now the most probably option,” Bruno Le Maire, France’s finance minister, has said.
All eyes can be on the euro to see if it finally ends up falling below the American dollar. The last time this happened was in November 2002, when the euro was value $0.99.
Since then, the euro enjoyed a gradual rise, reaching almost $1.60 in the summertime of 2008, when the Great Recession was wreaking financial havoc across the US.
But Russia’s full-scale attack against Ukraine has turned the tables around, taking a heavy toll on the EU’s economy. The invasion has upended energy markets and sent gas bills soaring to all-time highs.
The sudden shock has triggered record-breaking inflation across the eurozone, with an 8.6% figure in June, along with a gradual slowdown in economic activity.
The mix of each aspects has brought back the spectre of stagflation, a dangerous mix that depresses growth while goods remain excessively expensive for consumers and corporations.
The European Central Bank has already hiked rates of interest in a bid to tame inflation and plans to proceed doing so because the situation further deteriorates. But some analysts have criticised the ECB for moving too late in comparison with its counterparts within the US, the UK and Canada.
“Perhaps on some level, parity of Euro versus US Dollar is only a number,” Robin Brooks, chief economist on the Institute of International Finance (IIF), wrote on Twitter.
“But markets are made up of human beings who occur to care about levels, which provides parity a special psychological significance, not least since we have not seen [parity] in 20 years. This can be a big deal.”
The euro-dollar parity comes as Croatia finalises the method to affix the eurozone, becoming the twentieth EU member state to adopt the common currency.
On Thursday, the European Commission is scheduled to present its updated economic forecast, which is anticipated to incorporate a recent downward revision.
In the intervening time, Brussels has fastidiously avoided making any clear-cut projections about an imminent recession and continues to be hopeful the eurozone will be resilient enough to weather the disruption from the Ukraine war and the energy crisis.
