The European currency fell below the dollar again on Monday. It fell 0.25% to 0.9929 dollars around 3:30 p.m. after falling to 0.9878 dollars, the lowest since December 2002, the year it was put into circulation. A parity that didn’t work this Tuesday afternoon. As a reminder, last July, the euro already created trouble by falling to 0.9998 dollars. Since then, the greenback’s round trips down have increased, each time, a new record so that the European currency is currently posting its worst annual performance since its launch with a drop of 13 % since the beginning of 2022.
So the euro can fall even lower? If it is always difficult to make projections, for Christian de Boissieu, professor at the University of Paris 1 and vice-president of the Circle of economists, the time is not yet for panic, remembering that in October 2000, the European currency has reached . 0.8230 dollars, a level that has not been surpassed so far. ” We’re not there yet”, he gets angry. According to him, the euro will still see its value fall “little”as long as the energy crisis continues to threaten Europe. “One of the three reasons for the fall of the euro against the dollar was the energy dependence of the Twenty-Seven when the United States became independent to a certain extent that they exported energy. This reassured the markets , who was also worried about the situation in Europe, and raised the American currency when the European was suffering., he analyzed. It was also Friday’s announcement of the complete shutdown of the Nord Stream 1 gas pipeline by Russian Gazprom that caused this new fall in the euro.
No risk of collapse
Christian de Boissieu does not believe in a scenario like 2000: ” the balance of power between the United States and the euro zone is not the same. Europe, at that time, was weaker. And despite the energy challenge, it has its advantages”. A point of view shared by Alexandre Laporte, director of the trading room of IbanFirst, rejecting any idea of a collapse of the euro or even a return to the lowest point of 2000. We went from $1.20 at the end of 2020 to $1 today. To lose 0.20 cents the war in Ukraine is necessary. So an event of the same magnitude is needed to reach $0.80 again”, he reasoned. According to him, one of the most likely assumptions is a euro at 0.96 dollars at the end of 2022. “It will affect some sectors more than others, but businesses will adapt. Above all in this current time of change that is devastating”he analyzed, confirming the strong concern of some companies to see the euro fall again.
Limited ECB impact
Especially since a weak euro increases the price of imports and therefore strengthens the inflation that reached 9.1% in August during a year in the euro zone. However, the ECB’s strategy of trying to fight against rising prices risks having a limited effect. Since July, the financial institution, in fact, operates a tightening of monetary policy intended to fight against high inflation. The first rate increase of 50 basis points was implemented in July and the ECB should decide in the coming days on a second increase that could reach 75 basis points. But this policy has little weight on the rise in the price of raw materials, both energy and cereals or even metals, due to the war in Ukraine.
The increase in European rates remains, moreover, lower than that of the American Central Bank (Fed). In July, it recorded an increase in its key rates by three quarters of a percentage point, as in the previous meeting, held in mid-June. This is the largest rate increase in the United States since 1994. “Even when the ECB raised its rates by 75 basis points, the Fed took more of a lead, which attracted capital. It has been playing for a few months and it will continue to have an effect.”, predicted by Christian de Boissieu. However, the Fed’s arrest will have a devastating effect on the eurozone economy. Too much tightening of monetary policy can lead to a recession.
This risk also hangs in the United States, whose key rates are currently between 2.25% and 2.50%. Such a situation could reverse the trend and weaken the dollar, narrowing the gap with the European currency. Especially since an overvalued dollar can be a burden for the country, because it makes American products less competitive because they become more expensive. For example, the fall of the euro against the greenback in 2000 led to a concerted reaction by the central banks of the G7, which was mobilized by the Fed. Thus they sold many dollars and bought euros to lower the value of one and increase the value of the other. However, they are still far from considering such an operation.