Why the Euro Won’t Crash Further Against the Dollar

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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, its lowest since December 2002, the year it was put into circulation. A parity that had not moved this Tuesday afternoon. As a reminder, last July, the euro had already created a stir by falling to 0.9998 dollars. Since then, the round trips below the greenback have multiplied with, 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 start of 2022.

So can the euro 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, recalling that in October 2000 , the European currency had reached 0.8230 dollars, a level never equaled for the moment. ” We are not there yet”, he tempers. According to him, the euro could still see its value fall ” a little “as long as the energy crisis continues to threaten Europe. “One of the three factors of the fall of the euro against the dollar is the energy dependence of the Twenty-Seven when the United States manages to be independent to such an extent that they export energy. This reassures the markets, which are also worried about the situation in Europe, and drives up the American currency when the European one suffers., he analyzes. It is also the announcement on Friday of the complete shutdown of the Nord Stream 1 gas pipeline by the Russian Gazprom which caused this new fall in the euro.

No risk of collapse

Christian de Boissieu does not believe in a scenario like in 2000: “ the balance of power between the United States and the euro zone is not the same. Europe, at the time, was more fragile. And despite the energy challenge, it still has advantages”. A point of view shared by Alexandre Laporte, director of the trading room at IbanFirst, who rejects any idea of ​​a collapse of the euro or even of a return to its lowest point in 2000. We went from $1.20 at the end of 2020 to around $1 now. To lose 0.20 cents it took the war in Ukraine. It would therefore take an event of the same magnitude to reach $0.80 again”, he argues. According to him, one of the most probable hypotheses is that of a euro at 0.96 dollars at the end of 2022. “It will impact some sectors more than others, but businesses will adapt. It is above all this current period of volatility that is detrimental”he analyzes, testifying to the strong concern of certain companies to see the euro fall again.

Limited ECB effect

Especially since a weak euro increases the price of imports and therefore reinforces inflation which reached 9.1% in August over one year in the euro zone. However, the ECB’s strategy to try to fight against the rise in prices risks having a limited effect. Since July, the monetary institution has, in fact, operated a tightening of its monetary policy intended to fight against galloping inflation. A first rate hike of 50 basis points was implemented last July and the ECB should decide in the coming days on a second hike which could reach 75 basis points. But this policy has little weight on the surge in the price of raw materials, both energy and cereals or even metals, caused by the war in Ukraine.

The rise in European rates remains, moreover, much lower than that of the American Central Bank (Fed). In July, it had recorded an increase in its key rates by three quarters of a percentage point, as at its previous meeting, held in mid-June. It was the biggest rate hike in the United States since 1994. “Even if the ECB raises its rates by 75 basis points, the Fed has taken more of a lead, which attracts capital. It’s been playing for a few months and it’s going to continue to have an impact.”, predicts Christian de Boissieu. Nevertheless, catching up with the Fed would have a very damaging impact on the eurozone economy. Tightening monetary policy too much would lead to a recession.

This risk also hangs over the United States, whose key rates are now between 2.25% and 2.50%. Such a scenario could reverse the trend and weaken the dollar, narrowing the gap with the European currency. Especially since an overvalued dollar can become a burden for the country, because it makes American products less competitive since they have become more expensive. For example, the fall of the euro against the greenback in 2000 led to a joint reaction by the central banks of the G7, motivated by the Fed. They had thus massively sold dollars and bought euros to lower the value of one and raise that of the other. However, they are still a long way from considering such an operation.