scorecardresearchEuro reaches parity against Dollar for the first time in 20 years; Here's what this means for India
The ECB is highly expected to raise key interest rates by 25bps later this month, the first increase in more than 11 years.

Euro reaches parity against Dollar for the first time in 20 years; Here's what this means for India

Updated: 13 Jul 2022, 09:25 AM IST
TL;DR.
For more than a year, the euro has been losing ground against the US dollar, falling 15.21% in the last year. Sterling also fell back to $1.20 against the dollar. Both the euro and the pound are down around 10.97 per cent and 11.72 per cent respectively against the US currency this year.

The Euro, official currency of 19 member countries of the eurozone, has reached parity (1.0000) against the dollar for the first time in 20 years. The last time it happened was in November 2002, when the euro was worth $0.99.

At the same time, the U.S dollar index, which measures the greenback against six major currencies, hit $108.56, its highest since october 2022 according to data from Trading Economics shows. 

The euro dropped to a low of $0.9998 on Tuesday on the back of a full-blown energy crisis and fears over a potential recession in the Eurozone and the strong greenback.

Experts believe that in the coming weeks and months, the euro may even challenge its record low of $0.8245 scored in October of 2000.

For more than a year, the euro has been losing ground against the US dollar, falling 15.21% in the last year. Sterling also fell back to $1.20 against the dollar. Both the euro and the pound are down around 10.97 per cent and 11.72 per cent respectively against the US currency this year as fears over recession and inflation send investors running to the apparent safety of the dollar.

 

The euro has plunged against the greenback over the past year
The euro has plunged against the greenback over the past year

Meanwhile, the Fed's rate hikes cause yields on US Treasury bonds to climb, attracting investors seeking higher yields than they can find elsewhere in the world. This increased demand for dollar-denominated securities, in turn, boosts the dollar's value.

The euro’s decline has been spurred on by the divergence of monetary policy between the two economies, leading to a larger interest rate differential.

While the Fed's previously low-interest rates have kept the euro above the dollar, the Fed has recently begun to raise interest rates in order to control inflation. However, despite record inflation in the eurozone, the European Central Bank has yet to raise interest rates, owing to concerns that rate hikes could spark another debt crisis, according to media reports.

According to market experts, the Federal Reserve is seen delivering a 75 bps hike following a cumulative 150 bps increase since March. The ECB is highly expected to raise key interest rates by 25bps later this month, the first increase in more than 11 years.

Energy Crisis in the Eurozone

As per Reuters report, the biggest single pipeline carrying Russian gas to Germany began annual maintenance on Monday, cutting gas supplies to Europe and raising concerns about a prolonged halt to supply. Maintenance lasts from July 11 to July 21.

The Nord Stream 1 pipeline transports 55 billion cubic meters (bcm) a year of gas from Russia to Germany under the Baltic Sea.

Last month, Russia cut flows to 40% of the pipeline's total capacity, citing a delayed return on equipment being serviced by Germany's Siemens Energy in Canada. Canada said at the weekend it would return a repaired turbine, but it also said it would expand sanctions against Russia's energy sector.

Russia has cut off gas supplies to several European countries that did not comply with its demand for payment in roubles (Russian currency).

Germany has warned of recession if Russian gas flows are halted. Germany has moved to stage two of a three-tier emergency gas plan, which is one step before the government rations fuel consumption. Germany now imports about 35% of its gas from Russia, down from 55% before the Ukraine conflict.

Inflation at record levels

Inflation in the eurozone is at record levels. The annual inflation rate in the Euro Area increased to a new record high of 8.6% in June of 2022, up from 8.1% in May, data from Trading Economics shows.

The annual inflation rate in Germany slowed more than expected to 7.6% in June of 2022 from 7.9% in May, However, it was the highest reading since German reunification.

In Spain, annual inflation jumped to 10.2% in June 2022 from 8.7% in May. It is the highest rate since April 1985. Inflation in Portugal climbed to 8.7% in June 2022, the highest reading since December 1992.

Furthermore, Germany has recorded its first monthly trade deficit since 1991 amid soaring inflation and supply chain disruption. Germany  just like many other European nations has been paying more for energy and food, particularly in the wake of Russia’s invasion of Ukraine, CNBC reported. 

Can a decline in the euro aid Indian businesses?

Usually, a weaker domestic currency stimulates exports and makes imports more expensive. Conversely, a strong domestic currency hampers exports and makes imports cheaper.

The euro has recently depreciated against the rupee as well as other major currencies. So far in 2022, it is down nearly 4.96 percent against the INR and i has dropped by 9.02 percent in the last one year.

Euro is down 4.96 per cent against Rupee so far in this year
Euro is down 4.96 per cent against Rupee so far in this year

Indian businesses that have an export share or have subsidiaries in Europe are likely to be negatively impacted on account of translation losses.

On Tuesday Rupee hit a record low of 79.64 against the US dollar, amid persistent foreign portfolio outflows and a broadly stronger dollar. RBI last week took a few steps to increase foreign exchange inflows in the face of a massive dollar shortage.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

We explain here why does the rupee fluctuate against the dollar.
We explain here why does the rupee fluctuate against the dollar.