The euro is the European Union’s shared currency, which began as a digital currency in 1999 before paper money and coins were eventually printed several years later. Its value in comparison to other currencies has been falling over the last 12 months. As of last week, the euro was worth right around one US dollar, which hasn’t been the case for 20 years.
According to the European Central Bank (or ECB), upwards of 340 million Europeans use the euro. A recent count shows there are around 1.6 trillion euro in circulation. It’s the world’s second largest reserve currency behind only the US dollar. The euro first became worth more than the dollar in 2003, hitting a high water mark of $1.60 in 2008.
One of the main factors driving down the euro’s value is inflation. Europe’s inflation rate checked in at 8.6% year-over-year in June, which is similar to June’s CPI of 9.1%. The biggest difference between the two economies is monetary policy. The Federal Reserve has aggressively hiked rates in a bid to slow inflation, while the ECB is more hesitant given the war in Ukraine.
Gas and oil prices have also hit the eurozone harder due to its proximity and dependence on Russia, one of the world’s largest producers of fossil fuels.
The Fed’s rate hikes also indirectly push down the euro’s value relative to the dollar. Global investors may prefer to put money into interest-bearing accounts in the US because rates are higher, and that pushes up the dollar’s value.
For people living and spending money here in the US, the euro’s diminished value may seem unimportant. In reality, it could mean boosted spending power when buying things or traveling in Europe. Because the dollar is stronger by comparison, products imported from Europe will effectively be discounted.
For the broader economy there is a potential downside from dollar-euro parity. American goods being more expensive could impact the trade balance by boosting imports and harming exports. Also, Europe entering a recession would harm the global economy, including that of the US.
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