Euro Dollar parity and its effects

[Paul O Mahoney]

The Euro has for the first time since December 2002 hit parity with the US $. The euro at that time was in our pockets for only 12 months and I remember many commentators at that time saying to expect the euro never to trade above $1 ever.

Obviously those predictions were incorrect and in general the euro has remained a robust currency internationally, but has added debt to many EU countries balance sheets.

The economic world has changed in the last 20 years and the effects of parity might be different, and my question is what the effects will be now?

Before a discussion begins the general mood in the market is that while this level might be temporary many think that it could represent a mid point of trading over the medium term with 95c to €1.05 being a range spoken about by many.

Many are also saying that its slowness of the ECB in raising interest rates is the main contributing factor for this event.

We know that interest rates are going to rise within the eurozone soon with many saying that its likely that rates will rise between 150 and 200bps over the coming months and this is now baked in especially in fixed rate mortgages presently on the market.

However I would like to look beyond that effect and perhaps see what the effects of a weak euro will have on Ireland's economy over the medium term.

Obviously higher borrowing costs will affect disposable income and may help in stopping inflation rising higher or reversing the rate back down to reasonable levels.

Many have investments in $ based funds or have RSUs etc from US multinationals and those will increase in value on encashment, as will the income tax payable.

Our Multinationals, who primarily trade/export in $'s will also have more income on their books and by extension would this flow into increased taxable income?

Of course US based goods and fuel is going to get even more expensive and this will add more pressure on households over the coming months.

As you can see the effects are wide ranging and far too big for an OP, and my economic knowledge wouldn't be great, but as an open economy I think we are especially sensitive to major economic changes and I think a weak euro is a major change with unknown
consequences .

Edit: Let's try and not speculate on what might happen but what has happened yesterday and the likelihood of these rates continuing.

 

[joe sod]

It's down to the slowness of the ECB in raising interest rates compared to the dollar and other major currencies.
It's probably a mistake as they are exasperating inflation by allowing a depressed euro along with high oil prices.
Remember back in 2010 to 2012 when the euro was trading at $1.5 to the euro during the financial crash.
The ECB was way too slow in bringing in QE as almost broke up the euro, it was only with the timely intervention of Mario Draghi that saved the day. I think Christine Lagarde and Philip Lane are out of their depths in managing this crisis

 

[TLO]

We've been here before, and then some. Back in 1985 the US$ briefly reached parity with the old IR£. This happened at a time of fiscal expansion and elevated interest rates in the US, same as is happening now.

The ECB are way behind the curve. Still maintaining negative interest rates as Eurozone inflation approaches 10%. Madness.

 

[Paul O Mahoney]

It's down to the slowness of the ECB in raising interest rates compared to the dollar and other major currencies.
It's probably a mistake as they are exasperating inflation by allowing a depressed euro along with high oil prices.
Remember back in 2010 to 2012 when the euro was trading at $1.5 to the euro during the financial crash.
The ECB was way too slow in bringing in QE as almost broke up the euro, it was only with the timely intervention of Mario Draghi that saved the day. I think Christine Lagarde and Philip Lane are out of their depths in managing this crisis

Agreed but what's you view on the effects now?

We appear to be " in the path of a financial hurricane " according to Dimon of JP Morgan and Chase.

Inflation, supply chain issues, staff shortages and a steep rises in Covid cases. And QE gone I'd imagine

Btw Joe, you called the inflation increase during the pandemic many disagreed including myself, well done.

 

[NoRegretsCoyote]

The Euro has for the first time since December 2002 hit parity with the US $. The euro at that time was in our pockets for only 12 months and I remember many commentators at that time saying to expect the euro never to trade above $1 ever.

But inflation has been higher in the US. Since 2002 inflation in the US has been 64% but in the euro area a quarter less at 48%. So the purchasing power of the dollar has fallen by more than the euro.

So in real terms the exchange rate is not back to 2002 levels and won't be until a euro only buys $0.90.

 

[Pinoy adventure]

A massive drop from $1.15 since February,and it could go less.

 

[joe sod]

Btw Joe, you called the inflation increase during the pandemic many disagreed including myself, well

Thanks Paul , well it wasn't me it was the articles that I was reading were so convincing back then. Nobody could believe that with inflation not being an issue for 40years that it would come roaring back again.

Of course the catalyst for this inflation was the Covid lockdowns and shutting down entire industries ,travel and hospitality for nearly 2 years, that had never been done before now we see how difficult and chaotic it is to try and get it restarted again.
The war in Ukraine though was a wild card that Nobody could have predicted, the idiocy of Putin to do this.
It seemed so easy 2 years ago at the height of covid to close industries, print money and allow many people work from home now we are seeing the real repercussions of all this. Nothing is easy but once you stop the production process but continue to sustain demand by printing money you are going to get inflation

 

[BigBoots82]

My sense is central banks are hoping the inflation problem goes away on its own and the "aggressive" interest rate hikes and talk of quantitative tightnening and getting to neutral now are more about trying to do something to dampen future inflation when we are at who knows many times x on prices or in what year that is when current excess money supply in existence currently which is a key driver of high inflation runs its course through the system. How they believe this is possible when sovereign debt is at a scale that even meager interest rates are unaffordable and there is no let up to the huge economic deficits being run which is driving this higher particularly in th US is beyond me

 

[peemac]

Positives
Irish pensions have been cushioned from the 25%+ fall in US stock markets.
Americans think its very cheap when they holiday here - even at the high prices we see.

Negatives - almost all price related
Forget America as a holiday destination - Its ridiculously expensive
Fuel prices - oil and the refining margins are both in dollars as is coal. (40kg bag will be €35+ this winter)
Food prices - many raw materials are traded commodities and traded in dollars (wheat, soy, coffee, chocolate etc)
Electronics, Toys, Furniture, Homewares - huge amount made in China and priced in dollars, prices already noticeable increasing on China made electronics


Double negative - to stop the decline the ECB will have to raise interest rates far more aggressively. That will increase mortgage payments substantially for those with high mortgage borrowings.

 

[joe sod]

@BigBoots82 yes I agree with your analysis that the central banks are caught because of the huge levels of sovereign debt that's why the ECB is delaying raising interest rates but its still a mistake. If they had at least started the process it might have taken some of the heat out of inflation and the labour markets.

Look at the Irish government even with huge government receipts they were still borrowing loads of money because interest rates were negative. The whole QE thing encouraged governments to spend way more money than they needed to.

 

[Pinoy adventure]

Positives
Irish pensions have been cushioned from the 25%+ fall in US stock markets.
Americans think its very cheap when they holiday here - even at the high prices we see.

Negatives - almost all price related
Forget America as a holiday destination - Its ridiculously expensive
Fuel prices - oil and the refining margins are both in dollars as is coal. (40kg bag will be €35+ this winter)
Food prices - many raw materials are traded commodities and traded in dollars (wheat, soy, coffee, chocolate etc)
Electronics, Toys, Furniture, Homewares - huge amount made in China and priced in dollars, prices already noticeable increasing on China made electronics


Double negative - to stop the decline the ECB will have to raise interest rates far more aggressively. That will increase mortgage payments substantially for those with high mortgage borrowings.

If the ECB raise the interest rate,will the euro strengthen against the dollar??

 

[peemac]

If the ECB raise the interest rate,will the euro strengthen against the dollar??

It will need a combination of potential ceasefire in Ukraine and ECB telling the market that interest rates will rise more than they have intimated

You could also see the fed change tact too as it's hurting American exports.

 

[BigBoots82]

Another question I think not unrealated to the conversation above is what does the weaponisation of currency via the seizure of foreign USD reserves mean for the current monetary world order as we know it. I suspect the Ukraine conflict is only part of a massive power struggle between the east and west as to who should set the rules financially in the new world order. It would appear that China/Russia and friends have had enough of the USD as the global reserve currency and the US bossing them as the world's police about while surrounding them with missiles/warships etc.

 

[BigBoots82]

Also 1 thing which always strikes me as odd with the current system is how can any lender justify loaning money for 10 years etc at sub 2% when there is no chance inflation will average that or less over that period. I can understand they may be funded by deposits so cost of funds is low but surely they need consider real returns rather than nominal returns.

 

[jpd]

Which currency do you trust the most - US dollar, Euro, Yen, Yuan, Rouble?

If you ask this question to a few thousand people around the world, the overwhelming answer will be US dollar by a mile

No need to look any further for an answer

 

[joe sod]

Another question I think not unrealated to the conversation above is what does the weaponisation of currency via the seizure of foreign USD reserves mean for the current monetary world order as we know it. I suspect the Ukraine conflict is only part of a massive power struggle between the east and west as to who should set the rules financially in the new world order. It would appear that China/Russia and friends have had enough of the USD as the global reserve currency and the US bossing them as the world's police about while surrounding them with missiles/warships etc.

Well the West controls the monetary system because its basically a western system. China wanted to join it after the great opening up after Mao in 1970s, Russia after the fall of communism 1989.
They tried to come up with their own global system for much of the 20th century, didn't work.
Putin is also again trying to break the system, he broke all the rules by invading Ukraine . The second attempt by Putin is also grinding into the dust and another epic failure.
As for the US not exporting much, they are the biggest exporters of technology in the world. Where did the smart phones and covid vaccine come from, remember every one just wanted the Pfizer vaccine, nobody trusted the Russian or Chinese vaccines

 

[joe sod]

Most of US products aren't produced in the country boundaries of the USA, while innovation can be created the manufacturing is in global factories.

Pfizers vaccines for Europe are produced in Europe, the vaccine pill here in Ireland and the technology was Biontechs, with Pfizer able to manufacture and ship.

Smartphones has multiple designs but Apple were first out to market and manufacturing in multiple factories.

The dollar is the currency used globally but why? The gold standard is long gone and would Wall Street still be the global leader in international finance?

I don't see it being dropped but I simply cannot understand why it's still the dominant currency.

Because the US is the most powerful country in the world, it has the biggest economy ,the most powerful military which is also important,
The technology issue is crucial though to the power of the US,the sanctions stopping high tech components to Russia is the most critical of all the sanctions. Yes you are correct that the production of these high tech products are global but they are still US technology companies and the US controls where this technology is produced and exported to,

The value of the euro is simply down to the slowness of the ECB in raising interest rates and the lack of credibility by both Christine Lagarde and Philip lane in denying that inflation was an issue long before the Ukraine war. All it would have taken was 2 small interest rate rises starting 6 months ago to stabilize the euro and stave off the worst of the inflation . Now they will have to do it faster and higher interest rates to bring back stability. Also controls should have been imposed during covid to prevent stupid spending by governments , the PUP payments being a classic case of this.

All in all though inflation is the real price we are paying for covid, I doubt the central banks would print so much money in future pandemics or close down so many industries , the price was simply too high

 

[cream1]

I’m just back from the US, no doubt but inflation is an issue & weak € makes it very expensive. We paid $50 for compulsory valet parking at one hotel, per night!

 

[Peanuts20]

its not good news for US multi-nationals in Europe, last year, if we made €100m profit, it was maybe $112-$115m, Now, in effect, it's been cut by 10%. I'd expect some of them to retrench a bit as a result

 

[newirishman]

I’m just back from the US, no doubt but inflation is an issue & weak € makes it very expensive. We paid $50 for compulsory valet parking at one hotel, per night!

Whilst arguably on the higher end of the scale, $40+ hasn't been unusual even the last few years.
The exchange rate makes things a bit more painful for European travellers though.