The Euro collapses against the Dollar: the reasons for the imbalance

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The Euro collapses against the Dollar: the reasons for the imbalance

Since 2003, a minimum like this has not been seen in the disparity between the euro and the dollar, with the first losing 1.04 dollars at the close.

The euro has fallen by 1.5% compared to dollar so far in May. In April, the monthly decline was 4.7%, a real outrage for one of the most stable crosses in the currency market. But it is that the collapse since December 2021 is 8.6%. However, in this Friday’s session, the cross trades with some calm, although it has fallen to 1.0366 for a few moments.

The weakness of the euro, on the one hand, makes European exports more competitive, but on the other, it makes imports in other currencies more expensive and, above all, in dollars. This could result in a rise in inflation.

From ING they explain that “the euro/dollar cross broke the key support of 1.0500 this Thursday, as the current rocky risk environment continues to favor a stronger dollar, while uncertainty about the implications of the Ukraine war in Europe It’s still high.”

Euro/dollar exchange

For the same analysts, the next support is 1.0340. “A break below that level would make the risk of the euro/dollar reaching parity quite significant. We wouldn’t be surprised to see parity anytime soon. In fact, after losing the , euro/dollar volatility could easily rise again.”

What about the euro?

On the one hand, the war in Ukraine seriously threatens European economic activity and hits its currency, which also results in the investment and consumption decisions of European agents being postponed. This insecurity is causing capital to leave the euro zone.

“Currently, the euro is suffering greatly from uncertainty about future developments around the Ukraine war. After all, the sword of Damocles of an energy crisis hangs over the EU, especially if it decides to implement an embargo on sources or if the Russian side cuts off the energy supply it sends to the West across the board. In that case, the euro would fall below parity with the dollar,” Commerzbank experts warn in their weekly report.

The ECB must take more measures to improve this parity

The ECB must take more measures to improve this parity

On the other hand, the main economic consequence to date has been the rise in energy prices, which has an impact on the intrinsic weakness of the euro, and can be seen in the index prepared daily by the European Central Bank and which weighs the exchange rate of the euro with the currencies of the large trading partners of the bloc. The euro index accumulates a fall of 3.4% so far this year.

What about the Fed?

The ECB has toughened its speech, but has not yet taken action, while the Fed has already implemented two rate hikes and one of them has been 50 basis points.

Higher and increasingly divergent interest rates (with respect to Europe) make it more attractive for investors to move their money into American assets. These capital inflows strengthen the dollar and may weaken the euro, reported El Economista ES.

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