No, it was not a sharp depreciation - the euro has been losing ground against the dollar over the past 13 months. So among those who are closely following the situation, the news about the convergence of the value of the dollar and the euro did not even cause surprise.. But most people were still surprised, because for the last twenty years, the euro has always been worth more than the dollar.. Why did the Eurocurrency lose value

On the one hand, the crisis in Europe, the global turmoil caused by the Russian invasion of Ukraine, rising inflation. On the other hand, the dollar itself is also strengthening, thanks to the US Federal Reserve's aggressive campaign to combat inflation in the United States..

Indeed, the strengthening of the dollar in the world is good news. Indeed, going forward, this could lower the prices of commodities such as grain and potentially ease the relentless inflation that has driven household and business spending soaring..

But the depreciation of the euro is no longer a positive. First, the very dynamics of the change in the value of this currency hints at a slowdown in global trade, reinforcing fears of a global recession.. Very alarming signal that everything is bad. Worse yet, the war is a significant, but not the main factor in this..

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It is clear that Russia's large-scale attack on Ukraine has drastically changed the situation with food supplies and led to a sharp increase in energy prices around the world, especially in the European Union, where many countries are heavily dependent on fossil fuel imports from Russia.. As part of a pressure campaign against its eastern neighbor, the EU decided to abandon Russian oil, in response Moscow sharply reduced gas flows to Europe. It is clear that both the first and second increased spending for Europeans, who have almost recovered from the pandemic, but in fact, they still have not reached sustainable growth rates, and the inflation problem has not been solved.. Now it has only worsened and goes side by side with a host of logistical problems, shortages of certain goods and increased government spending..

In the United States, the Fed, realizing that when, if not now, is aggressively raising interest rates, boosting Treasury yields and making the dollar more attractive to investors than the euro. Yes, not only the taming of inflation is due to the actions of the Americans. Do not forget that there is a huge amount of free money in the world, the owners of which are always looking for “where it is deeper”, especially in such troubled times.. The regulator in the US has already raised rates three times in 2022 and has signaled that it plans four more hikes as part of its future strategy..

The European Central Bank can also be expected to raise rates to bring inflation back to its 2% target, but will do so at a slower pace than in the United States: it has scheduled a 0.25 percentage point hike in July, while the Fed. That is, the dollar, traditionally regarded as a safe haven for investors, will continue to strengthen this role as investors maneuver on the uncertain economic playing field in Europe and elsewhere..

We expect the dollar to continue to benefit from its safe-haven status for international investors and commercial interests, especially given the weaker European economy..

What does the current parity mean for the euro? Considering that there are no grounds for a reversal and growth now, this is a signal that the fall will continue.. Despite fears that euro-dollar parity is being described as a “psychological” milestone that is sure to be a turning point for the currency, it is important to understand that the price is already far from its 2008 peak of around $1.60, which means that the process of weakening the currency has been started for a long time.. It should be expected that Europe will no longer get away with soft market regulation and modest actions, so pressure on the Union's single currency may remain a trend in the near future. Central banks and politicians on the continent will be forced to respond to fears of further depreciation of their currencies. The psychological impact is equally important for investors:

they will be very focused on the market, flows and liquidity.

The crisis in Europe will not be resolved quickly, as energy and inflationary pressures on the economy will have an aftereffect on the purchasing power of the population in the coming years, not months. So it is possible to forecast an additional fall of the euro against the dollar to the level of 0.96–0.99 this year.

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Read more articles by Alexander Boltyan at the link.