The euro/dollar exchange rate has finally reached the parity that had been simmering in recent weeks. In particular, the euro has fallen to match the dollar for the first time in 20 years, since 2002. This phenomenon, unseen in the last two decades, is taking place against a backdrop of market fears that Europe may end up in recession, at a time of very high inflation, with the authorities studying the steps to be taken to curb prices without excessively damaging growth, and in the face of the gas crisis that Russia is stirring up with the possibility that it may definitively cut off supplies.
Source: European Central Bank
The US dollar is the only asset that is proving to be a safe haven investment in this difficult year, says Guillermo Santos Aramburu, parter at iCapital, and global markets expert. The US currency is always the recipient of fearful money from any part of the world and that is why it has accumulated a revaluation of more than 12% in the year and has reached parity with the euro and high revaluations with respect to other strong currencies such as the yen – the Spanish expert continues.
As Mr. Santos says, the level reached could even be breached, as happened in the early 2000s with the dotcom crisis and the collapse of all world market, but these factors that have driven the USD could turn around in the coming months. As he remarks, unless we fall into a deep recession, the Euro is likely to recover ground in the latter part of 2022 and in 2023.
Morganne Delledonne, Head of Investment Strategy Europe de Global X, says that with the euro now at parity with the US dollar for the first time in two decades, the region faces headwinds from higher imported inflation as US companies gain purchasing power. Eurozone and UK balances of payments are deteriorating and the risk of recession is increasing in the region, reinforcing the dollar’s strength against sterling and the euro.
For Hernán Cortés, Partner at Olea Gestión, and Co-manager of the Olea Neutral Fund, It is surprising to see the euro-dollar back at 2002 levels. He says that if we take into account the short-term interest rate differential of 2.50% in favour of the dollar, Europe’s greater economic vulnerability due to the conflict in Ukraine, Europe’s almost absolute dependence on foreign energy supplies as opposed to the US self-sufficiency, and the traditional agility of the US to face a potential crisis, we should not be surprised by the dollar’s strength.
Cortés remarks how surprised he is by the calmness with which the Fed is observing this move, considering that the GDP figure for the first quarter was negative largely due to the foreign sector. Perhaps, as he says, the Fed is prioritising inflation over growth.