/View.info/ The European currency is experiencing difficult times. The euro has fallen to the values of twenty years ago – one to one with the dollar and even lower. Why is the euro behaving this way, what does this mean for the economy of the West and Europe in particular – and what does the price of Russian gas have to do with what is happening?
The European currency entered a new historical period. It has been depreciating against the dollar for a year, but on Tuesday, an event not seen in a long time finally happened. The euro fell below one dollar. This is the first time since December 2002, according to data from the world exchange “Forex”. The euro-dollar pair was at 0.9999 by midday, but that figure soon rose to 1.0008. This means that the euro has reached parity with the dollar.
On the Moscow Stock Exchange, the euro also surprised everyone: in rubles, the European currency almost equaled the dollar at around 59.3. In addition, during the trading session on July 11, the exchange rate of the dollar against the ruble exceeded the euro by several times, according to the data of the trading platform.
Historical deviation: from the moment of the formation of the euro until 2003, this currency was worth less than the dollar. Since 2003, however, the situation has changed: the euro was worth more than the dollar by 2022.
This unique situation with the euro is a serious sign of trouble in the European economy. The situation is in many ways reminiscent of 2001, when the euro also fell sharply against the dollar.
“In 2001, the euro fell to 0.8283. Investors didn’t believe in the euro, so they bet on the collapse of the eurozone and invested in the dollar. Now the situation is similar. The dollar is a safe haven asset, while the euro has weakened in the market due to high energy prices, gas shortages, high inflation and a slowing EU economy. If the EU does not collapse within a year, then with the recovery of the euro, the difference against the dollar will again become positive, as it has been since 2003,” says Vladislav Antonov, financial analyst at BitRiver.
The weakening of the euro is also linked to the energy crisis and the inaction of the ECB, which did not keep the exchange rate at zero until the US Federal Reserve started raising interest rates and thus strengthened the dollar. “Investors fear that due to the inaction of the ECB and the lack of gas in the winter, the EU economy will not avoid recession. “European politicians are afraid that Gazprom will find a reason not to launch Nord Stream 1 after repairs and deprive Europe of gas in response to sanctions,” says Antonov.
Western regulators need to raise key interest rates to combat the record inflation facing North America and Europe. Why is the ECB in no hurry to raise interest rates? Probably because the aggressive actions of the Fed did not help the US to control inflation.
“For now, the ECB’s actions appear to be more justified as, with the same high inflation rates, eurozone GDP grew by 5.4% in the first quarter and in the US it fell by 1.6%, increasing the risks of a recession.” Already at the meeting in July, we expect the ECB to act aggressively on this issue to start fighting inflation. But much more important for EU countries may be the reduction of Russian gas supplies, because this will lead to a decline in industrial production and increase the risks of recession, as well as increase the unemployment rate, say the analysts of Freedom Finance “.
Benefits for the European economy can be found in the cheap euro. Ultimately, this lowers the price of European goods on the world market and helps exporters. But the energy crisis in the EU devalues these benefits.
“Amid the strengthening of the ruble and rising Russian gas prices, many European companies are on the verge of closing. They start operating at a loss. No one wants to lift sanctions to lower gas prices. And gas in Europe already costs 1,800 dollars per thousand cubic meters. The euro is really under threat,” says Antonov.
What’s next for the euro? Analysts avoid precise forecasts due to geopolitical risks. However, several trends can be distinguished.
According to Antonov, quotations in euro are cyclical. For analysis, he used the history of European currency quotations since 1979. At the time, there was the ecu – the currency unit used in the European monetary system in 1979-1998. But since the ecu switched one-to-one to the euro, the entire history of quotations can be used for analysis, explains the expert.
“The 16-year cycle has been good for the euro. Now it should go through a growth phase until 2026. However, after the pandemic, this upward cycle fell apart,” says Antonov.
In addition, according to him, there are three options for the development of events. First, the cycle is lengthening and the euro will start to grow, only later. Second, there will be a reversal of the cycle and the euro will remain in a downtrend until 2026 in the 0.80-0.83 region. The third way: If European politicians continue on their course of destroying their economies, then sellers will reach the 0.83 target by 2024, Antonov concludes.
Translation: V. Sergeev
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