Euro-dollar Parity

In News

• Recently, the euro and the U.S. dollar reached parity meaning one dollar could buy one euro in the foreign exchange market.

About Euro-dollar Parity 

• Meaning: It means the European and American currencies are worth the same amount.
• Reasons: 
  • Demand and Supply: The price of any currency in a market economy is determined by supply and demand.
    • The supply of a country’s currency in the foreign exchange market is determined by various factors such as central bank policy and the local demand for imports and foreign assets.
    • The demand for a country’s currency is determined by factors such as central bank policy and the foreign demand for exports and domestic assets.
  • Inflation: higher energy prices and record inflation are to blame.
  • U.S. Federal Reserve: As the Fed raises interest rates, the rates on interest-bearing investments tend to rise as well. If the Fed raises rates more than the European Central Bank, higher interest returns will attract investor money from euros into dollar-denominated investments.
  • Russia’s invasion of Ukraine: The value of the euro has been affected by the uncertainty in energy supplies in the wake of Russia’s invasion of Ukraine and the ensuing actions against Russia.
    • Europe now has to shell out more euros to import limited energy supplies, which in turn has adversely affected the value of the euro against the U.S. dollar.
• Implications:
  • American tourists in Europe will find cheaper hotel and restaurant bills and admission tickets.
  • Exports: The weaker euro could make European export goods more competitive on price in the United States.
  • Moderate inflation: In the U.S a stronger dollar means lower prices on imported goods from cars and computers to toys and medical equipment which could help moderate inflation.
  • Business earnings: American companies that do a lot of business in Europe will see the revenue from those businesses shrink when and if they bring those earnings back to the U.S.
  • Stronger dollar: A key worry for the U.S. is that a stronger dollar makes the U.S.-made products more expensive in overseas markets, widening the trade deficit and reducing economic output, while giving foreign products a price edge in the United States.
  • A weaker euro can be a headache for the European Central Bank because it can mean higher prices for imported goods, particularly oil, which is priced in dollars.
• Other currencies
  • The euro is not the only currency that is depreciating at the moment.
  • The Japanese yen is another major currency that has lost about 20% of its value against the U.S. dollar this year as the Japanese central bank continues to stick to its easy monetary policy.

Source: TH