LONDON (NewsNation) — The euro dropped below parity against the dollar on Wednesday, the first time it’s done so in almost two decades.
Although Europe’s single currency started this year on a strong note, Russia’s invasion of Ukraine led to surging gas prices and fears that Moscow could cut off supplies, raising the specture of recession and hurting the euro. The euro tanked as much as 0.4% to a low of $0.9998, its lowest level since December 2002, according to Reuters. In total this year, the euro, shared by 19 European countries, has slumped more than 11 percent this year, according to the New York Times.
“Gas rationing, stagflation, an expected recession, they are all good reasons to be bearish on the euro,” Stuart Cole, head macroeconomist at Equiti Capital in London said before the currency crossed that threshold.
Despite inflation, and concern about a potential recession, the U.S. economy is on firmer footing compared to Europe.
Global uncertainty and an aggressive monetary policy stance benefited the dollar, which is climbing mainly because the Federal Reserve is raising interest rates to cool the hottest U.S. inflation in four decades. As the Fed hikes rates,yields on U.S. Treasurys rise, attracting investors. This increased demand for dollar-denominated securities, in turn, boosts the dollar’s value.
As the New York Times said, investors, as they do with any other asset, can buy currencies directly when they think they will grow in value, and sell when they determine they will decline. People looking for a safe place to house their money buy more dollars during times of economic distress, the New York Times said, but this is at the expense of currencies like the euro.
A weakening euro could negatively affect American companies as goods become more expensive for foreign buyers, effectively stalling the U.S.’ economy even more, according to USA Today. On the other hand, a stronger buck provides some relief from inflation because goods imported to the U.S., such as cars, computers and medical equipment, become less expensive.
Bloomberg reported that the euro dropping below parity is a problem for both the European Central Bank and consumers in the 12 trillion-euro economy, especially with an out of control inflation spike. A slowdown of the European economy could give the bank less leeway to raise rates and moderate economic growth to address inflation.
“The ECB does not target a particular exchange rate,” an ECB spokesperson said on Wednesday in Bloomberg. “However, we are always attentive to the impact of the exchange rate on inflation, in line with our mandate for price stability.”
Reuters and The Associated Press contributed to this report.