The overarching theme of the 2-decade low Euro-Dollar:
investors buying more USD, causing it to appreciate relative to the Euro. There
seem to be 2 main reasons for this – inflation in US and a recession risk in
EU.
Russia and Ukraine supply a significant amount of
wheat and corn, and Russia itself is also a “major supplier of oil, gas, and
metals”. With the war, the supplies of these commodities have sharply
decreased, causing a spike in prices (Ellyatt, 2022). Europe was hit
particularly hard because of their closer trading relations with Russia. In 2021,
EU imported US$168.75 billion worth of goods from Russia, while US only
imported US$30.76 billion in that same period (Trading Economics, 2022).
Although inflation hit both regions, peaking in US at
9.1% in June and 8.9% in Eurozone in July (Trading Economics, 2022), only the
US was quick to tackle this problem. They increased their Fed Funds Rate from 0.25%
in March to 2.5% in July this year. In contrast, the Euro Area only increased
its interest rate from 0% in June to 0.5% in July (Trading Economics, 2022). With
the higher increase in interest rates in US, investors move towards USD,
causing it to appreciate relative to Euro.
The Eurozone is also facing a recession risk (Faller
& Landon, 2022). The reduction of oil and gas imported is alarming as these
are needed for heating in the coming winter, representing an energy crisis.
There is uncertainty in the region, with Italy’s and UK’s prime ministers Mario
Draghi and Boris Johnson resigning recently (Faller & Landon, 2022). Due to
this recession risk, it will be difficult for the ECB to increase rates which
stunt growth.
With the increased interest rate in US and the uncertainty
in the EU, investors flock to the safe haven that is the US Dollar (WEForum,
2022).
According to a Cambridge professor, roughly 50% of the Eurozone’s imports are invoiced in USD (O Falk, 2022). With a weakened Euro, their Dollar imports will get more expensive, exacerbating inflation. Households and businesses will feel the pinch, especially if they import their goods and services. The upside is that Euro exports will be cheaper and likely to benefit major Euro exporters like Germany and France, improving their competitiveness (O Falk, 2022). This also includes tourism, which is now “on sale”, prompting increased travel to Europe (O’Brien, 2022).
