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Euro Slips Below Dollar as Europe’s Economic Fortunes Slump
Currency falls as fears of Russian gas cutoff shake the bloc’s economy
By Chelsey Dulaney and Tom Fairless
The euro’s slide below parity with the U.S. dollar reflects Europe’s sinking economic fortunes in the face of the war in Ukraine. But unlike the last time the euro was this weak 20 years ago, nobody is coming to the common currency’s rescue.
One euro recently bought $0.9983, the common currency’s weakest level since 2002. The euro has been on a steady decline this year, and the selloff intensified in recent days as investors girded for Russia to enact a full-blown gas cutoff that many fear will drive the region into a deep recession. Driving the euro even further lower on Thursday was a brewing political crisis in Italy.
Reaching parity—when two currencies are equal in value—is largely symbolic for investors, and is expected to have a limited impact on financial markets. But a weak euro does affect the region’s economy. It drives up the cost of imports and fans Europe’s already high inflation rate while making what Europe exports cheaper in international markets.
“What it is indicative of is that this is a horrific situation for the eurozone,” said James Athey, investment director at Abrdn, who thinks the euro could fall to 90 U.S. cents or below in the short term.
The weak euro evokes memories of the euro’s first years of existence in the early 2000s. The newly minted currency traded below parity with the dollar and was gripped by a “confidence crisis,” said Carsten Brzeski, chief eurozone economist at ING.
Back then, global central banks were forced to step in to help stem the slide in the euro, which policy makers feared would hurt the global economy. It took almost three years for the euro to fully find its way back above parity. It has traded stronger than the dollar ever since, even throughout the early 2010s sovereign-debt crisis that nearly tore the bloc apart.
This time, the euro’s weakness is less about confidence in the euro as a currency than about a set of economic realities, including the bloc’s energy woes, Mr. Brzeski says.
The weak euro is also the flip side of the broad strength of the U.S. dollar, which buys more today compared with other currencies than it has in a generation.
Crucially, U.S. policy makers have signaled they are relaxed about a strong dollar, which helps in the battle against soaring inflation. That makes a coordinated intervention by central banks to support the euro less likely.
Driving the dollar has been an aggressive Federal Reserve, more intent on raising interest rates to fight inflation than other central banks. Cash tends to gravitate to economies that offer a combination of growth prospects and higher interest rates. Fed Chair Jerome Powell told congressional leaders last month that a strong dollar could help reduce inflation.
The European Central Bank has kept the euro under pressure by moving more slowly to increase interest rates than the Fed.
The euro has lost more than a 10th of its value versus the dollar this year, and briefly dipped just below $1 on Wednesday on some, but not all, foreign-exchange trading platforms. Unlike stocks, there is no centralized pricing for currency trading. On Thursday, the euro fell below parity according to broker Tullett Prebon, which provides data to The Wall Street Journal.
The ECB is expected to lift its key interest rate by one-quarter of a percentage point next week, to minus 0.25%, marking its first rate increase in more than a decade. After this week’s soaring inflation report, the Fed, in contrast, is expected to increase its policy rate by as much as an entire percentage point to a range of 2.5% to 2.75% this month.
A weaker euro makes Europe’s exports cheaper while helping to lure overseas tourists to the beaches and resorts of Greece and Spain. That export-boosting effect is being eaten up by a large increase in the price of the continent’s imports, especially energy and raw materials, many of which are priced in dollars, analysts say. Those price increases are driving up inflation across the currency bloc.
“The extreme price increases in import and producer prices overshadow any profit that exporters can book for themselves due to a weaker currency,” said Sonja Marten, head of foreign exchange and monetary policy research at DZ Bank in Frankfurt.
Cheap Russian energy has been a key crutch of Europe’s industrial power. Now, investors fear that Russia will use maintenance that began Monday on the Baltic gas pipeline Nord Stream as an opportunity to cut off those gas flows to Germany for good.
Despite efforts to reduce its dependence on Russia in the wake of that nation’s invasion of Ukraine, the European Union still relied on Russia for about 20% of its gas supply in June, according to Brussels think tank Bruegel. Russia has cut off supplies to EU member states including Poland, Bulgaria and Finland and reduced flows to Germany.
The weak euro complicates the ECB’s task of controlling inflation.
Some ECB officials have signaled publicly in recent weeks that they would like to see a stronger euro, suggesting that the bank might be ready to increase rates more aggressively. The ECB’s chief economist, Philip Lane, highlighted the weakness of the euro at the bank’s latest policy meeting in June, and ECB officials kept the door open at that meeting to a larger interest-rate increase this month, according to the minutes, which were published last week.
But the ECB’s pushback has been limited, suggesting that policy makers are relatively relaxed about the euro’s short-term price movements.
For the ECB, “it is not the absolute level of the exchange rate that is decisive, but the dynamics and speed of the movement,” said Ms. Marten. “A premature intervention in a fundamentally driven market could fizzle out and thus endanger the reputation of the ECB.”
Any move to increase rates sharply could threaten to intensify the longstanding imbalances within the bloc that drove the sovereign-debt crisis.
Borrowing costs in Southern Europe surged by much more than those in Germany after the ECB unveiled plans in May for a gradual series of interest-rate increases. Those yields have fallen in recent weeks after the ECB announced last month that it was developing a new bond-buying tool to prevent “fragmentation” among countries, which it is expected to unveil after its July 21 policy meeting.
Kiran Ganesh, a multiasset strategist at UBS, believes the euro will recover against the dollar as the market focus shifts to the prospect of the Fed cutting rates to cushion a slowing economy. On top of that, the euro’s cheapness will eventually bring buyers back.
“If the dollar gets too strong, then at some point the U.S. starts to lose some appeal as an investment destination because everything gets expensive for overseas investors,” he said. “In the end things do get too cheap in Europe as compared to the U.S.”
