Reviews | The dollar strengthened while the euro lost ground

A $1 bill and a one euro coin are worth almost exactly the same amount, for the first time in 20 years. The euro has been trading above the dollar since 2002, but according to price sources tracked by Bloomberg, on Wednesday the euro, used by 19 countries, briefly fell below the dollar, hitting a low of $0.9998 before bouncing back to $1.003 in afternoon trading in London. The dollar strengthened against a wide range of currencies while the euro lost ground, especially against the dollar.

This is great news for Americans traveling to Paris as their dollars will buy more; it’s bad for Parisians going the other way. It’s good for European exporters because they get more euros for every dollar of goods they sell in the United States; it’s tough on US companies exporting to Europe or competing with imports from Europe.

You might be wondering why the dollar is so strong when inflation is high and a possible recession is looming. (The Bureau of Labor Statistics reported Wednesday that consumer prices rose 9.1% in the year through June, the largest 12-month change since November 1981.) High inflation, after everything, tends to erode the value of a currency. And recession makes a currency less attractive by reducing the returns investors can expect from their investments.

The explanation? All is relative. The United States has inflation, but so does Europe. The difference is that the United States has higher interest rates and they are expected to rise further in the coming months. International investors are willing to pay more for dollars in order to obtain the higher yields offered in the US money market.

The European Central Bank could defend the value of the euro by raising interest rates as the Federal Reserve did, but it dares not do so because the eurozone economy is more fragile. This is partly because of the war in Ukraine, which affects Europeans much more than Americans. Energy costs in Europe have skyrocketed. The latest dip in the euro came in response to the shutdown for maintenance of the Nord Stream 1 gas pipeline, which supplies natural gas from Russia to Western Europe. Some Europeans fear that Russia is keeping the pipeline closed to punish Europe for its support for Ukraine.

The dollar also takes advantage of investors’ knee-jerk reaction to put their money into dollar assets whenever there are problems, perceiving the United States as a safe haven. “Risk aversion and safe-haven dynamics are the dominant driver” of the dollar’s value right now, George Saravelos, global head of currency research for Deutsche Bank in London, told me.

Although in theory a cheaper currency helps an economy’s balance of trade, this has not been the case lately for the Eurozone, which is running trade deficits. Germany recorded in May its first monthly trade deficit since 1991, the year after reunification. German exports are weak and the prices of imports, including energy, have risen sharply.

For Germany, the parity between the dollar and the euro “could not have fallen at a worse time”, wrote Susanne Mundschenk, founder and director of the information and analysis service Eurointelligence, in an e-mail. mail. “The parity means that imports become more expensive, which pushes up inflation even further without solving any of the supply chain problems.”

For the US Federal Reserve, the rise in the dollar is good, overall. This helps the bank achieve its goal of curbing inflation, as a stronger currency keeps import prices down.

A financial theory suggests that when interest rates are higher in the United States, expect the dollar to lose ground in the coming months. Otherwise, investing in dollars would be a free lunch. But this condition, known as covered interest parity, does not always hold in times of international financial difficulties.

Another way to tell if a currency is fairly valued is to compare its purchasing power to that of other currencies. An item like a pound of copper would have to be equally expensive in all currencies, otherwise someone could make a guaranteed profit by buying it where it’s cheap and selling it where it’s expensive. In practice, purchasing power parity doesn’t exactly hold, but neither can it be violated for too long. According to estimates of purchasing power from the Organization for Economic Co-operation and Development, “the dollar has not been so overvalued against the euro, the pound sterling and the yen for at least 30 years”, wrote Marc Chandler, managing director of Bannockburn Global Forex. in an email.

It is therefore possible that we see the bottom of the euro at this time. Saravelos, for his part, predicts that the euro will be back above the dollar by the end of the year if tensions ease in Ukraine or if the Fed becomes more dovish. This would be good news for many Europeans.

India will become the most populous nation in 2023, overtaking China, the United Nations predicted this week. The UN also said that the world’s population is “expected to peak at around 10.4 billion people during the 2080s and remain at this level until 2100”. He predicted that more than half of the population increase by 2050 will occur in eight countries: the Democratic Republic of Congo, Egypt, Ethiopia, India, Nigeria, Pakistan, the Philippines and Tanzania.

“Oh, I have three kids and no money. Why can’t I have kids and three pennies?”

– Homer Simpson

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