The euro is approaching parity with the US dollar.

 

  • As of Thursday morning in Europe, the euro was hovering around $1.05, after falling steadily for nearly a year, from around $1.22 in June. Earlier this week, the common currency fell to just above $1.03. 
  • For the first time in 20 years, the euro is approaching parity with the US dollar, but currency strategists are divided on whether it will reach that level and what it will mean for investors and the economy. 
  • Concerns about Russia’s war in Ukraine, surging inflation, supply chain issues, slowing growth, and tightening monetary policy have pushed investors toward traditional “safe haven” assets, strengthening the dollar.
  • Divergence in monetary policy among central banks has also contributed to the narrowing of the two currencies. The US Federal Reserve raised benchmark borrowing rates by half a percentage point earlier this month, its second hike of 2022, as it seeks to rein in the Fed and the ECB, which will affect the EURUSD pair. The currency is also being dragged down by the evolution of the EUR’s core balance of payments flows and the prospect of additional negative energy supply shocks. A move to parity between the euro and the dollar, according to Gallo, would necessitate ECB “policy inertia” over the summer, in the form of unchanged rates and a full German embargo on Russian fossil fuel imports, resulting in energy rationing

 

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