Why the euro will not crash further against the dollar


The European currency fell back below the dollar on Monday. It fell 0.25% to $0.9929 around 3:30 p.m., after falling to $0.9878, its lowest level since December 2002, the year it went into circulation. A parity that had not moved this Tuesday afternoon. As a reminder, last July, the euro had already created a stir by falling to $0.9998. Since then, round trips under the dollar have multiplied with, each time, a new record, so that the European currency is currently recording its worst annual performance since its launch with a drop of 13% since the beginning of 2022. .

So can the euro fall even lower? If it is always difficult to make projections, for Christian de Boissieu, professor at the University of Paris 1 and vice president of the Circle of Economists, it is not yet time to panic, recalling that in October 2000, the European currency had reached 0.8230 dollars, a level never equaled for the moment. ” We’re not there yet”, it warms up According to him, the euro could still see its value fall ” a little “while the energy crisis continues to threaten Europe. “One of the three factors of the fall of the euro against the dollar is the energy dependence of the Twenty-seven when the United States manages to be independent to the point that they export energy. This reassures the markets, which are also concerned about the situation in Europe, and pushes the American currency higher when the European one suffers., analyze. It is also the announcement on Friday of the total closure of the Nord Stream 1 gas pipeline by Russia’s Gazprom that caused this new fall in the euro.

No risk of collapse

Christian de Boissieu does not believe in a scenario like the one in 2000: “ the balance of power between the United States and the euro zone is not the same. Europe, at that time, was more fragile. And despite the energy challenge, it still has advantages.”. A point of view shared by Alexandre Laporte, director of the IbanFirst trading room, who rejects any idea of ​​a collapse of the euro or even a return to its lowest point in 2000. We went from $1.20 at the end of 2020 to around $1 now. To lose 0.20 cents it took the war in Ukraine. Therefore, it would take an event of the same magnitude to reach $0.80 again.”, he argument. According to him, one of the most probable hypotheses is that of a euro at 0.96 dollars at the end of 2022. “It will affect some sectors more than others, but companies will adapt. It is above all this current period of volatility that is detrimental.”analyzes, testifying to the strong concern of certain companies to see the euro fall again.

Limited ECB effect

Especially since a weak euro increases the price of imports and therefore reinforces inflation that reached 9.1% in August for a year in the euro zone. However, the ECB’s strategy to try to fight rising prices risks having a limited effect. Since July, the monetary institution has, in fact, operated a tightening of its monetary policy aimed at fighting rampant inflation. Last July, a first rate hike of 50 basis points was implemented and the ECB should decide on a second rate hike in the coming days that could reach 75 basis points. But this policy has little weight in the rise in the prices of raw materials, both energy and cereals or even metals, caused by the war in Ukraine.

The rise in European interest rates continues to be, moreover, much lower than that of the American Central Bank (Fed). In July it had registered a rise in its reference rates of three quarters of a percentage point, as in its previous meeting, held in mid-June. It was the biggest rate hike in the United States since 1994. “Even if the ECB raises its rates by 75 basis points, the Fed has taken more advantage, which attracts capital. It’s been going off for a few months and it will continue to have an impact.”, predicts Christian de Boissieu. However, catching up with the Fed would have a very damaging impact on the eurozone economy. Tightening monetary policy too much would lead to a recession.

This risk also hangs over the United States, whose key rates are now between 2.25% and 2.50%. Such a scenario could reverse the trend and weaken the dollar, closing the gap with the European currency. Especially since an overvalued dollar can become a burden for the country, because it makes US products less competitive by becoming more expensive. For example, the fall of the euro against the dollar in 2000 caused a joint reaction of the central banks of the G7, motivated by the Fed. Thus they had massively sold dollars and bought euros to lower the value of one and raise the value of the other. However, they are still far from considering an operation of this type.