The fall of the euro against the dollar becomes more tangible with the latest data available on the price of these currencies. The euro is trading today for $1.0290, a price not seen for 20 years, in December 2002, when it was at $1.0296, according to data from the European Central Bank. In June it fell by 3.03%, and so far in July it has depreciated by 1.3%.
Although this fall of the euro against the dollar has been taking place since June 2021, the euro had not gone down so sharply. The previous downward peak was at the end of October 2016, when the euro was placed at $1.0401.
Inflation in the European Union, Russia’s war in Ukraine and the price of energy have pushed the US currency higher. Although the main reason, according to Antonio Sanabria, professor of Applied Economics at the Complutense University of Madrid, is that the United States Federal Reserve raised interest rates in mid-June due to inflation in the country.
“This makes the United States attract more capital and funds,” says the expert, who assures that if the European Central Bank continues on the path of raising them as well, although at the moment it is softer than the United States, “it is very likely that the currencies return to your previous levels, to how they were.”
The fall of the euro against the dollar does not depend on a single factor
Kamal Romero, professor of Applied Economics at the CEU San Pablo University, sees this fall as a set of factors in which the rise in interest rates by the United States Federal Reserve is the icing on the cake, and which may influence more than expected. What do investors think?
The expert points out that the European economies have greater signs of weakness at the moment due to how the price of energy and raw materials and the geopolitical conflict that is at their doors have influenced them. Romero also points out that while the United States has been borrowing for decades and its debt is “safe”, the European has behaved differently.
The effects of the fall of the euro: imports become more expensive while exports become cheaper
To buy products from another country and import them, you have to pay for them with the currency of that country. In other words, if an American company wants to buy something in Spain, it will have to pay for it in euros. Now that the euro has fallen and is closer to the dollar, it will be cheaper for other companies to buy in the European Union if they exchange from the dollar, as Sanabria explains.
It would happen the other way around for the countries of the euro zone that have to buy fossil fuels and fuels that are paid for in dollars. Now it will be much more expensive for countries that use the euro as their currency.
Therefore, this depreciation can also affect imports and exports in the euro zone, even if they have the same currency. The expert gives a fictitious example of a company in France, as a country that depends on energy imports, which uses it intensively, such as a tile factory. If a Spanish company wants to buy its products, it will see that it has to pay a higher price, since the energy used by the French company will be more expensive. Ultimately, this will affect the consumer.
Affects the ability to purchase fuel and oil
The dollar is the currency used to purchase gas, oil and other raw materials in international markets, as Sanabria states.
Therefore, the price of fuel and oil depends on the exchange rate of dollars to euros. As Adolfo Núñez Sarompas, professor of the Master’s Degree in Renewable Energies and Energy Efficiency at the Distance University of Madrid (Udima), explains to Newtral.es, if the euro has suffered a fall and is worth fewer dollars than before, it means that “to buy the same amount of oil [en dólares] you need more euros”. “We are almost at a 1:1 ratio and it is possible that even the dollar could even be somewhat above the euro in the medium term”, comments the expert.
For Sanabria, this will have negative consequences for the consumer, who will see the prices of gasoline and electricity rise if the rest of the elements remain constant.
“The effect it has is to increase the cost of fuels, whether fuels such as gasoline or diesel, or electricity to the extent that fossil fuels are used. It would have an impact on the consumer if the rest of the elements that can affect fuel prices remain constant. A change in price demand varies very little or not at all, since if fuels are needed they will continue to be purchased”, explains Sanabria.
European Central Bank
Antonio Sanabria, Professor of Applied Economics at the Complutense University of Madrid
Kamal Romero, Professor of Applied Economics at CEU San Pablo University
Adolfo Núñez Sarompas, professor of the Master’s Degree in Renewable Energies and Energy Efficiency at the Distance University of Madrid (Udima)
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