Euro Dips Below the Dollar as Eurozone Inflation Soars, First Time in Two Decades

On Wednesday, the euro dropped below the dollar for the first time in over two decades. As the Ukrainian conflict pulls the single currency lower, the euro has had a rapid and harsh decline this year, and it has crossed a significant milestone for the first time in more than two decades: parity with the dollar.

At 12:45 GMT, a single euro bought $0.998 on the foreign exchange market, down 0.4% for the day. As the dollar rose, the euro plummeted below $1 per greenback for the first time in over two decades, threatening eurozone inflation, which is already at a record high of 8.1% due to the Russia-Ukraine conflict.

Fears that Russia may restrict Europe’s energy supplies have increased the likelihood of a eurozone recession. The European Central Bank has been slow to raise interest rates, further weakening the euro. The dollar has been strong in recent months, boosted by the US Federal Reserve raising interest rates and investors seeking the safe haven of dollar assets during times of global instability.

Currencies typically rise when the appropriate central bank raises interest rates, as overseas investors seek a higher return on assets denominated in that currency. A weakening currency raises the cost of imports for eurozone countries, particularly for items priced in dollars, such as crude oil.

European stocks sank dramatically on Wednesday after June US inflation came in higher than expected, heightening expectations of a more aggressive Federal Reserve next week and driving the euro below parity with the dollar for the first time in 20 years. According to data, consumer prices in the United States increased by 9.1% in June as fuel and food prices remained high, culminating in the highest annual increase in inflation in 40 years.

President Joe Biden advised Americans to be calm in the face of the new report, saying his administration was committed to addressing the issue while claiming that gas prices had reduced slightly and that the country was on the right track. The savings would give American households much-needed breathing room.

According to analysts, the euro will remain in the doldrums until the economic picture improves. Even if the External Commercial Borrowings (ECB) raises rates, the Fed raises them even more, enticing money into the US. The euro might also be harmed by fragmentation risks, in which weaker countries’ borrowing rates rise faster than their wealthier counterparts.

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