The weakened euro may soon reach parity with the U.S. dollar, but that’s not cause for alarm in the financial markets, said Peter Tibbles, senior vice president of Foreign Exchange at BOK Financial®.
“Big picture, it’s just another number,” said Tibbles. “1:1 is just a number.”
Launched on Jan. 1, 1999, in an effort to boost European stability, the euro has spent less than two years valued lower than the dollar and peaked at $1.60 in 2008. But it has been in steady decline since last June, when it hit $1.22.
Since February, when Russia invaded Ukraine, the currency has fallen more than 6% against the dollar.
“The first time it reached parity with the U.S. dollar was in the early 2000s,” Tibbles said. “At that time, confidence was low in the new single currency. The euro reached lows of 0.8230 at which time the European Central Bank intervened to assist the struggling new euro.
In addition to the war in Ukraine, Inflation, changes in global trade and other factors can also impact the value of a currency, Tibbles explained.
Recently, the Swiss franc weakened and reached parity with the USD for the first time in two years; the Japanese yen is at its lowest level since 2002; and the British pound has taken a significant hit.
“Everything happening with the war in Ukraine and the Federal Reserve is impacting the value of the euro,” Tibbles said. “The weakening was somewhat expected. Although the European Central Bank has signaled they will raise rates, it feels like they are behind the federal reserve which has already begun raising interest rates this side of the pond. This tends to exacerbate the sell-off in the euro versus the U.S dollar.”
Sometimes, he added, the changes in currency value and monetary policy is about hitting an inflation target and correcting economic imbalance—just like what’s happening in the U.S right now.
When comparing currencies, though, Tibbles said it’s important to remember that both sides of the ratio are contributing to the relationship.
“By that I mean, the strength of the dollar contributes as much as the weakening of the euro,” he said.
Does this impact the U.S.?
Travelers, those doing business in Europe and investors will likely feel the effect.
“We see a lot of euro buying for people purchasing goods overseas,” Tibbles said. “As that rate comes down, it’s cheaper for those buyers to buy the same product. On the other hand, when selling into Europe—that euro is worth less than it was six months or a year ago. So the impact depends on which side of the trade you’re on.”
For investors, Tibbles added, “You can hedge against a low euro if you know you have euro receivables or if you’re concerned it could go lower. You can also lock in rates at these levels right now so if it goes lower, you’re protected.
“Foreign exchange is in flux, because it’s always in flux,” said Tibbles. “We do have certain clarity from the Fed with regards to where interest rates are going and how quickly they’re going to get there for the rest of this year. The market is trying to evaluate how businesses are going to deal with higher interest rates, and higher inflation which leads to higher costs.”
Many experts predict the euro could fall even lower at the start of 2023, which would be bad news for the currency. But for now, Tibbles said, the euro is fluctuating well within a range we’ve seen before. Looking ahead, the war in Ukraine remains at the forefront of this conversation.
“If the conflict expands to other countries, you’ll see action in the markets,” he said. “If that happens, other currencies could collapse. The euro is used in 19 countries, so there are eastern European currencies that would certainly be impacted. We’ll just have to wait and see.”
In short, Tibbles said, it’s reasonable to assume the euro could reach parity.