USD and Euro Near Equal, First Time in 20 Years
- On January 1, 1999, the Euro was introduced, becoming the staple currency of twelve countries within the European Union (EU).
- Since 2002, the Euro has been worth more than the United States Dollar (USD), but recent economic downturns have caused the two currencies to be near parity.
- Parity means two currencies will equal each other and can be used in one another’s country.
On January 1, 1999, the Euro was introduced and became the staple currency of twelve European Union (EU) countries. When it was first implemented, it did not perform well compared to the United States Dollar (USD), as the exchange rate reached its lowest point of $82.30 in October 2000. However, in 2002, the Euro was worth more than the US dollar. This came to be due to a consistent trade surplus that strengthened the European currency, while fraudulent activity on Wall Street decreased the value of the US dollar.
Despite its prolonged success since 2002, the Euro has been declining in value since the start of 2022 and is now in parity with the US dollar.
What is Currency Parity?
Currency parity is when the exchange rate of two currencies is equal to one another. In theory, this could mean when traveling abroad, $5 can be used to purchase an item worth 5€. Generally, not many businesses accept foreign currency as they can change in value over time.
In the case of the USD and Euro, they are nearing parity, meaning that their bank notes could be used internationally without a change in purchasing power.
Factors Behind USD and Euro Nearing Parity
Russian Invasion into Ukraine
One of the main reasons the Euro has been lowering in value since the beginning of 2022 is the Russian invasion of Ukraine. As Russia’s actions were not condemned, the Western countries and the EU threatened to impose sanctions, which would disallow economic activity to occur within Russia.
Sanctions are economic repercussions put forth on a country that does not follow specific laws that are in place. Since Russia did not follow the laws and invaded Ukraine anyway, many countries imposed sanctions to hurt Russia’s economy.
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Although these threats were supposed to hurt the Russian economy, they caused an energy crisis within the EU. The EU imports a quarter of its energy consumption from Russia. These sanctions prohibiting countries from collaborating with them caused higher natural gas, energy, and oil prices as well as inflation within the EU. As inflation negatively affects the economy, the energy crisis arising from Russia’s actions has lowered the value of the Euro in comparison to the USD.
Recommended Read: The Russia-Ukraine War is Impacting Gas Prices
Due to the global COVID-19 pandemic and other economic factors, high inflation rates have been crippling many countries’ economies. To combat this major economic issue, the European Central Bank (ECB) has begun raising interest rates to reduce inflation, similar to the United States.
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Recommended Read: The Inflation Rate’s Rising: Here’s Why You Need to Invest
However, there is speculation that the ECB will be unable to continue raising rates since Germany recorded a trade deficit (when imports exceed exports) for the first time in more than 20 years. This economic factor could prevent the ECB from continuing to raise interest rates.
Similar to the ECB, the Federal Reserve has also been raising interest rates to help combat inflation. However, if the ECB struggles with increasing interest rates, this will lead many investors, domestic and international, to invest in American companies, causing a stronger USD.
The Money Wrap-Up
As of July 13, 2022, the Euro is parity with the USD, meaning these currencies hold the same value. If the Euro continues to decrease in value, this could be good news for Americans, particularly Americans who like to vacation in European countries. On the other hand, if the Euro were to rise in value, it would be more expensive to fly to Europe as the USD would be worth less than a Euro.
Knowing the exchange rate of a given country is crucial when wanting to travel abroad, as this rate will determine the amount of money that will need to be spent on the trip. Therefore, before planning and finalizing any trips, figure out how much money it would cost in your base currency before confirming anything.
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