On July 12, the euro equaled the US dollar, a drop for the first since it began its journey in 2002.
The euro was launched in non-physical forms like travelers checks and wire transfers in 1999 and three years later paper and coins hit the market. In no time, the single European currency has taken over the greenback and the two currencies only reached parity almost two weeks ago.
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The euro has been losing ground against the U.S. dollar since January when one euro was worth just one dollar and 13 cents, down from one dollar and 60 cents, a high reached in 2008.
The euro matching or dipping below the dollar presents a currency war that has far-reaching impacts on every country in the world
Bangladesh Bank recorded a return of Tk 103.36 for each euro while the dollar traded at Tk 84.80 on May 31, 2021. On the same day this year, the exchange rates settled at Tk 96 and 89 Tk, respectively.
The strengthening of the dollar continued until June and finally, the two currencies remained at par on July 12th.
WHY IT HAPPENED
The answer lies both inside and outside Europe.
One can easily single out Russia’s war against Ukraine as it triggered huge risks for the EU economy. But there are more.
With energy prices already skyrocketing, Russia’s shutdown of the Nord Stream 1 gas pipeline to Germany on July 11, apparently for maintenance, helped push the euro down.
Stricter regulations and higher taxes slowed the growth of European economies in 2018 and 2019. Then Covid-19 arrived and less resilience in Eurozone economies became apparent. Another blow was the inflationary consequences of the pandemic.
Political unrest in Italy played a key role in the Euro’s decline. Italian Prime Minister Mario Draghi resigned last week after one of his broad coalition parties, the 5 Star Movement, withdrew its support in a parliamentary vote of confidence.
Italy is known to be the third partner among 19 member states, the first two being Germany and France.
The European Central Bank appears to be falling behind the US Federal Reserve in the fight against inflation. The Fed has aggressively raised interest rates to stem high inflation for 40 years.
Elsewhere, the ECB raised interest rates on Thursday, the first hike in 11 years in a bid to calm runaway inflation, which jumped to 8.6% in June, the highest in its history. The ECB raised the key rate by 50 basis points.
The Fed should go ahead with its plan to raise the key rate by 75 basis points. It raised the rate by the same margin in June.
NOT A WINNER TAKES THE WHOLE GAME
The euro matching or dipping below the dollar presents a currency war that has far-reaching impacts on every country in the world.
A weaker euro propels the cost of imports and stokes Europe’s already high inflation rate. It makes European products cheaper on the world market.
The flip side of a weaker euro is a stronger US dollar. The general strength of the dollar is good for Americans buying in Europe, good for anyone planning a vacation in Europe, good for our manufacturers selling in America, and good for our expats sending US dollars home.
Conversely, the fall of the euro is bad for those who earn wages in euros or export from the euro zone, bad for our exporters to this market and bad for our shippers from 19 nations because their relatives will collect a lesser amount .
This would be ugly in the longer term, as a less powerful euro portends slower economic growth for Europe. Some experts even argue that Europe is heading for a recession. There was talk from all over that a recession is coming to America and now Europe is joining it.
WHAT IS THE NEXT
This newspaper published an AFP article on July 18 saying that if Nord Stream 1 does not turn back on, the economic shock wave will be felt around the world as the European energy crisis could very well trigger a recession.
If gas flows from Russia normalize, or at least stop declining, that should somewhat ease market fears of an impending gas crisis in Europe. But the fear is widespread that the cessation of deliveries will be final. As French President Emmanuel Macron said: “Russia uses energy as a weapon of war”.
The parity may not be at its lowest for the euro at the moment, but a recession is not yet inevitable. While the ECB’s smarter actions are still in the wings, what Europe needs now is an alternative source of crude.
There are increasingly clear signs that global energy relations could take a drastic turn in the near future.
New York Times columnists Anatoly Kurmanev and Farnaz Fasshihi wrote on July 13: “The oil competition sparked by Russia’s invasion of Ukraine already appears to be bringing Venezuela one step closer to the West, after years of deep freeze in electoral and human relations. rights abuses by the authoritarian rulers of the country. »
Iran and Venezuela have shown solidarity with Russia since the war began on Feb. 24, but ironically rising energy prices could bring Iranian and Venezuelan interests closer to the West . Both have plenty of oil, are ready to sell more, and can be very helpful in America’s and Europe’s search for a new source of energy.
The author is a Fellow of the Pacific Council on International Policy and a former Trade Counselor at the Los Angeles Consulate in Bangladesh. He can be contacted at [email protected]