“The dollar is at its highest level since 2000, having appreciated 22% against the yen, 13% against the Euro and 6% against emerging market currencies since the start of this year” (Gopinath and Gourinchas, 2022). This is the first time in 20 years that the dollar is stronger in value than the euro, the latter being last valued below USD$1 on July 15th of 2002 (Los Angeles Times). This happened mainly because Russia cut relations with the rest of Europe and stopped delivering their natural gas supplies due to the Russia-Ukraine war. Just before the war started, 1 euro was equivalent to USD$1.15. Nonetheless, there are other reasons why this is occurring.
One major factor that is contributing to the pricing of the dollar are the rising US interest rates. The U.S. Federal Reserve has been fighting ongoing increasing inflation rates and has tried to establish new policy interest rates. Deutsche Welle (DW) has explained that the U.S. Central Bank has expressed a difference in interest rates by 225 basis points since March of this year, although the European Central Bank (ECB) has only raised 50 basis points. If the Federal Reserve raises rates more than the European Central Bank, it will attract investors as higher demand for a currency causes the currency to appreciate in value. They will have to sell euros and buy dollars to keep up with the higher interest returns and buy holdings, which causes the euro’s value to change. A weaker Euro means that it is more difficult for Europeans to afford U.S. imports, including those that are used in the manufacturing of other goods.
A weaker currency represents good news for exporters and economies that have strong exportations such as Germany because businesses importing European goods make their exports cheaper in American dollars. Nonetheless, factors such as restrictions, and the war in Ukraine represent significant obstacles. “In the current situation with geopolitical tensions, I think the benefits from a weak currency are smaller than the disadvantages,” Brzeski stated. Nonetheless, if U.S. travelers plan to head to Europe, they better do it while the euro is still weak because based on the parity level standards (European and American currencies being worth nearly the same amount), they would receive 1000 euros while changing 1000 dollars instead of receiving 900 euros (per se). No one knows if this phenomenon will change in the near future, but for now, economists need to analyze ways in which the euro can get stronger again to return to its original state.
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