Home Business The euro falls against the dollar, what consequences for the economy?

The euro falls against the dollar, what consequences for the economy?

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The euro has continued to fall on the international currency market since the start of the year, reaching $1.05 on Tuesday May 3, a drop of 7.45% since January 1. A value never seen since the appearance of the single currency in the early 2000s.

The dollar deemed more stable

Several reasons explain the increase in the rate of the dollar against the single European currency: the growth of American GDP, better in 2021 than in the euro zone (5.7% against 5.2%), but also the consequences of the war in Ukraine, which have hit Europe harder than the United States, not to mention the slowdown in the Chinese economy, a victim of its “zero Covid” strategy. All of these factors have led investors, fearing that the situation will continue to deteriorate on the Old Continent, to turn more towards the greenback, deemed to be more stable. A rise in demand for US currency leads to an increase in its value against other currencies.

In addition, announcements from the US central bank (Fed), due on Wednesday May 4 – including that of a half-point increase in its key rate – are bolstering investor confidence in a more responsive Fed in containment. inflation than its European counterpart.

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More expensive imports

The depreciation of the euro could have consequences on the economy of member countries, including France. Admittedly, the devaluation of the single currency could favor European exports. Indeed, products from the euro zone will have a reduced value if they are purchased in American currency, as is often the case on world markets.

However, the setback will be felt in imports, with purchases of foreign goods becoming more expensive. This price increase could worsen inflation, already at a record rate of 7.5% in March in the euro zone (4.8% in France and 7.3% in Germany).

Oil, in particular, continues to be traded in dollars on the world market. European countries will therefore have to pay more to import black gold. Beyond oil, the entire energy sector could experience an increase in costs on the Old Continent, in a context where the United States seeks to replace Russia in European energy supply with gas liquefied natural gas (LNG).

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A transitional situation

In addition to transactions with the United States, there are those with other foreign countries. Some currencies have an exchange rate attached to the American currency, which allows them to maintain the same value on a dollar basis. This is the case, for example, of certain oil-producing countries, such as Saudi Arabia, Qatar or Oman, but also of countries with a strong financial sector, such as Hong Kong, Singapore or Malaysia. Thus, a depreciation of the value of the euro could lead to an increase in the costs of imports and transactions with these countries.

However, the situation is not alarming. Analysts agree on a rise in the rate of the euro by the end of the year, to approach its historical equilibrium value, around 1.30 dollar. The ECB has in fact repeatedly mentioned the possibility of raising its key rate this summer, if inflation persists at a high level. However, caution is called for because Europe is not immune to a deterioration in its situation as a result of the war and Russian sanctions.

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