What explains the fall of the euro so sharply

The last time the European common currency was worth one dollar was in early December 2002. On Wednesday morning (6), the euro fell to the mark of US$ 1.02, or two cents on the dollar below the figure from the previous day. A year ago, it was quoted at around $1.18.

Experts no longer rule out the possibility that the two currencies will reach parity again soon. The euro reached its lowest point on July 5, 2001, when it traded at $0.8380.

The slump of the European currency is mainly due to fears of a recession. Above all, the risk of a gas supply freeze worries financial markets, as it would cripple the economy in Germany and Europe. “The situation is still good, but it is fragile,” Ulrich Leuchtmann, a currency specialist at Commerzbank, told Deutschlandfunk radio.

Parity as an advantage?

A weak currency can also have its advantages as it helps exporting companies. After all, domestic products are cheaper abroad, which boosts sales. At the same time, however, purchasing power is also exported abroad, which starts to buy cheaper German and European products.

In any case, the advantage for local exporting companies only exists as long as German businessmen manufacture their products entirely in Germany or the eurozone and then export them, says Sonja Marten, a foreign exchange specialist at DZ-Bank.

“Once they buy primary products from non-EU countries [União Europeia] or that are produced using a lot of energy, this calculation no longer makes sense”, she says, pointing out that energy sources in particular are billed in dollars.

Inflation also puts pressure on the euro

Rising energy prices were the main reason Germany’s external trade balance turned negative in June for the first time in many years, meaning the country imported more – including oil and gas – than it exported.

High import prices, especially energy, are also boosting inflation. And that’s not good for the European Central Bank (ECB). After all, he wants to offset inflation with planned interest rate hikes.

At the same time, however, the ECB must not do this too quickly, otherwise it risks crippling the economy. “He could first try to intervene verbally,” analyzes Marten. But experience shows that this is more likely to attract speculators, who could push the euro exchange rate down again within a few days.

The downward movement of the last few days, however, is already unusual: “This shows the nervousness of the markets”, says Marten. Therefore, the expert does not exclude the possibility of parity or even a short-term valuation below this mark.

Transatlantic recession fears

The fact that the euro is so weak against the dollar is always related to the valuation of the US currency. “The US Federal Reserve, the Fed, is setting the pace again,” explains former Allianz Chief Economist Michael Heise. The institution is taking measures against inflation and has already started raising interest rates.

At times this scared the stock market, which feared a recession in the United States, says Marten. But now the eyes are on Europe: if the American economy collapses, the recession will also hit the European continent.

undervalued euro

But financial markets now expect the Fed to take a more cautious stance, notes Heise, who is currently chief economist at the HQ Trust.

If the ECB actually makes the first interest rate hike in July and further hikes follow, perhaps even raising interest rates a little higher than previously thought, he believes this could help the euro exchange rate again.

Thus, the common European currency could be quoted again at US$ 1.10, or even higher. Currently, Heise considers the dollar’s purchasing power to be overvalued anyway.

Markets are nervous because of the uncertainty. If gas from Russia continues to reach European countries, that should also help the euro, expects Commerzbank’s Ulrich Leuchtmann. “In any case, such a low euro exchange rate is not justified.”