Near Equal Dollar and Euro Create Bargains for (Some) Americans     – CNET

Near Equal Dollar and Euro Create Bargains for (Some) Americans – CNET

The euro made big news in July 2022 when it fell to the same value as the US dollar for the first time in two decades. It hasn’t recovered much — after an expected dip of the dollar on Aug. 12, one euro is still only worth $1.03. That’s down from $1.18 at the end of Aug. 2021, or a 12.7% drop.

It’s not simply that the euro’s falling, however. The dollar has been rising due to higher interest rates and global economic uncertainties such as the war in Ukraine.

A strong dollar could be a boon for American travelers funding foreign trips with dollars, as their money now buys more compared to prices in euros. The currency rate change will also impact American businesses: Although imports into the US are now cheaper, American companies earning money in foreign currencies will make less when profits are converted into dollars.

Learn why the value of the euro is falling and what it means for Americans.

What is the euro?

The euro (represented by the symbol “€”) is the currency for 19 of the 27 states in the European Union referred to as the eurozone: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.

The EU introduced the euro as a digital currency in 1999 and began rolling out coins and paper money in 2002. According to the European Central Bank, more than 340 million Europeans use the euro.

With about €1.6 trillion in circulation as of June 2022, the euro is the second largest reserve currency in the world, trailing only the US dollar. After its introduction in 1999, the euro was worth less than the dollar for a few years, but has held a higher value consistently since 2003, reaching a high of near $1.60 during the summer of 2008.

Why is the dollar almost equal to the euro?

There are several factors at play here. To start, inflation is hitting Europe hard, with an 8.9% rate in July and no relief expected through the end of 2022. 

While this economic outlook bears a striking resemblance to what’s happening in the US, with inflation rising 8.5% year-over-year as of Aug. 2022, there are some stark differences.

Graph of the euro price from 2018 to June 2022

The value of the euro has plunged in 2022.

Federal Reserve Economic Data

Economic shocks from the war in Ukraine, particularly related to rising gas and oil prices, have hit Europe harder than the US, and have many experts predicting an extended recession in Europe. 

“Russia’s invasion of Ukraine is a seismic shock for the Euro zone, because so much of the European growth model has been predicated on cheap Russian energy. That’s over & done with. Recession & structural headwinds are coming,” Robin Brooks, chief economist at the institute of International Finance tweeted on Thursday.

Also, although the European Central Bank raised interest rates 0.50% in July 2022, the US Federal Reserve has raised rates four times this year for a total of an 2.25% increase, with another hike expected next month.

The Fed’s decision to raise interest rates in the US has had an indirect impact on the euro’s value. As American interest rates rise, so does the value of interest-bearing accounts in the US, making them more attractive to investors globally.

As more investors convert euros into dollars to invest, the value of the euro drops. This has helped strengthen the US dollar throughout 2022, while weakening the euro. In fact, the Federal Reserve’s Real Broad Dollar Index — an inflation-adjusted valuation of the US dollar — is at its highest point since its creation in 2006. 

How does a weaker euro impact Americans? 

The US is a major trading partner with Europe, and while the weaker euro should bring price discounts on imports for American consumers, it will make American products more expensive for European consumers. A continuing advantage for the dollar over the euro might lead to a heightened trade imbalance and hurt the economic output of American businesses.

American businesses and workers that operate in Europe and are paid in euros will also see their incomes decrease, if they are converting their European earnings back to dollars.

In the larger economic picture, a recession in Europe, especially one that involves rationing of gas and energy, could lead to a global recession, of which the World Bank has recently warned. In its June Global Economic Prospects report, President David Malpass remarked that even “if a global recession is averted, the pain of stagflation could persist for several years — unless major supply increases are set in motion.”

Does a stronger dollar save money for Americans traveling in Europe?

It certainly makes the math of converting dollars to euros a bit easier. A €250 train ticket will cost you a little more than $250. (Last June, that same ticket would have cost you $305.)

A less valuable euro basically means a roughly 13% discount for Americans using dollars to buy things in Europe, compared to last summer. For example, in Aug. 2021, $100 would only get you about €85 worth of goods or services. Now, that same hundred bucks can get you €97 worth, as of Aug. 12, 2022.

However, inflation is hitting Europe even harder than the US. Its 8.9% annual rate eats away most of the savings you get from the 13% drop in the euro compared to last year. An Aug. 9 report from Bloomberg demonstrated that the effective costs in Europe for Americans right now are about equal to what they were last year.

If you are planning a trip to Europe, you’ll want to use a credit or debit card that doesn’t change a foreign transaction fee in order to get the most from the discounted euro. Some cards will charge 3% to 5% for every transaction, taking bites out of your conversion discount.

The bad news? Prices might be cheaper for Americans once you get to Europe, but flying there has been difficult due to increased demand and a lack of preparedness from a tourism industry rebounding from the COVID-19 pandemic. According to NPR, “passengers are encountering chaotic scenes at airports, including lengthy delays, canceled flights and headaches over lost luggage.”

What about buying European products online?

Any websites that use the euro as their accepted currency will essentially be cheaper for Americans converting dollars to make purchases, exactly as the currency conversion discount (compared to last summer) applies to goods and services bought in person.

For customers in the US, the weaker euro could also lower prices on imported goods from Europe, regardless of whether you purchase them in stores or online.

What comes next for the euro?

The biggest impact so far in the decline of the euro might be psychological. The rise of the euro as a competitor to the dollar has been an important political project for the EU. On its 20th anniversary, European Parliament President David Sassoli called the euro “a condition for protecting and relaunching the European economic, social, and political model in the face of the transformations of our time.”

If it’s value continues to drop in 2022, the euro could lose the confidence of European investors, leading to a longer term challenge for the economic stability of the European Union.

For more information on the current state of the economy, learn why inflation is so high in the US, how to prepare for a recession and which states are sending new stimulus checks to residents.

Peter Butler

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