In search of a stable currency
The Lebanese people have been struggling to find a stable exchange rate for the USD and the Lebanese pound (lira) since 2019.
As a result, they had to find another stable universal currency to rely on, namely the euro, to exchange their liras to ensure that their money did not lose value.
And many Lebanese have done it.
Then, on Thursday, February 24, 2022, Russia invaded Ukraine, causing the value of the EURO to fall, creating a new situation of panic among the Lebanese who had exchanged their liras and dollars for euros.
On February 24, €1 EUR was equivalent to $1.119. As of today, August 26, 08:00 EDT, the EURO rate is €1 = $1.0006, according to Bloomberg.
Why does the euro fall below the dollar parity
The general deterioration in the outlook for the eurozone amid soaring gas prices and fears that Russia will cut natural gas supplies is dragging the common currency down.
The huge reliance of major economies, such as Germany, on Russian gas has left investors baffled, with economists forecasting a much faster recession in the euro zone than in the United States.
Fears that Russia could restrict energy supplies to Europe have increased the risks of a recession in the eurozone.
Added to this is the difference in interest rate levels in the United States and the euro zone.
The US Federal Reserve has been more aggressive in raising interest rates in its fight against inflation while the European Central Bank (ECB) has lagged other central banks in raising rates, further weakening inflation. ‘euro.
What is dollar parity?
Parity basically means that $1 is equal to €1.
The parity level is often a point of resistance that Euro investors fight over to determine which direction the currency goes from there.
Such was the case when the euro fell towards parity last month. The currency avoided a close below parity after briefly falling to this level.
The euro fell behind the dollar parity last Monday, August 22, with the exchange rate of €1 equaling $0.9945 for the first time in almost 20 years.
The ECB puzzle
The economists said that “the ECB is caught in the worst dilemma a central bank can face: on the one hand, inflation is soaring and requires higher interest rates, on the other hand, growth eurozone is anemic and would benefit from low interest rates.”
Ultimately, the falling Euro compounds the inflation problem by importing more inflation due to the weak Euro.
As is the case in Lebanon, European consumers should expect even higher prices, as well as higher energy and raw material costs.
Last month, the ECB raised interest rates for the first time in 11 years by half a percentage point higher than expected. It is expected to add another hike next month, but if the economy slips deeper into recession, that could put the ECB’s round of rate hikes on hold.
Who wins and who loses
USD holders in Europe will find hotel and restaurant bills and entrance tickets cheaper.
The weaker euro could make European export goods more price competitive in the United States.
In the United States, a stronger dollar means lower prices for imported goods, which will contribute to inflation.
U.S. companies that do a lot of business in Europe will see the revenue of those companies decline when and if they bring that revenue back to the U.S.
A weaker euro can be a headache for the European Central Bank (ECB) as it can mean higher prices for imported goods, especially oil, which is priced in dollars.