Frantic special meetings of the European Central Bank, a determined US Federal Reserve – no doubt: inflation is currently crushing the euro, while the dollar is strengthening. One euro will soon cost only one dollar. This hurts tourists, but it might even please others.
Inflation is forcing the US Federal Reserve to raise interest rates more than it has in almost three decades: According to the decision on Wednesday evening, it is up by 0.75 percentage points. US Federal Reserve President Jerome Powell also made it clear that another interest rate hike is due in July. The European Central Bank, on the other hand, is more cautious. Although it held an extraordinary meeting on Wednesday because it also has to get the escalating inflation under control, it knows at the same time that the tripping steps it has announced towards higher interest rates are not enough.
It faces the dilemma of either not curbing inflation enough or raising interest rates so much that this would drive the heavily indebted southern countries in the euro area into bankruptcy. Significantly higher interest rates in the USA, significantly lower ones in Europe – the consequence of these different central bank policies is that the dollar is gaining in value while the euro is falling. Parity is approaching – and even more: “We assume that the euro will fall below parity with the dollar,” expects Robin Brooks, chief economist of the International Banking Federation (IIF).
That hurts the Germans. “Not all Germans believe in God,” said former European Commission President Jacques Delors, “but all believe in the Bundesbank.” This belief was once closely associated with the D-Mark. In contrast to the Italian lira or the French franc, for example, it was considered a “hard” currency. The Germans, Delors said, expected their money to be strong, hard, and heavy at best. Coins should weigh a bit and bills shouldn’t crumple as easily. The D-Mark – that was such a real chunk of money. Most have forgotten that it fluctuated much more violently than the euro ever did. The Germans are now all the more struck by the fairly certain prophecy that a euro will soon be worth as much as a dollar or even less. They’re hit in their self-esteem.
However, this is not necessary. Because initially there is nothing more behind the development than a different central bank policy. The US Federal Reserve is raising interest rates faster and more than its European counterpart. And since interest is the price of money, the dollar rises. With the exception of tourists who are planning a trip outside the euro countries and now have to dig deeper into their pockets, this is good for many at first. Because this makes export products from Europe cheaper abroad and therefore more attractive. This helps the economy in export nations like Germany. Machines “Made in Germany” are becoming cheaper in the USA, and since mechanical engineering is one of the most important export sectors in this country, the companies behind it benefit from the weak euro.
Conversely, products from the US will become more expensive: it may hit the iPhone, it will hit foods like corn and soy, and it will hit the energy supplies that are currently in demand. The bottom line, however, is that the benefits of a weak euro are likely to outweigh the damage in the short term. Other nations also have fewer problems with this: the Japanese yen has also fallen sharply compared to the dollar, without the alarm sirens wailing in Japan as a result.
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In the long run, however, a shrug is out of place. Because the central banks’ decisions are based on various inflation scenarios – and that’s less good. The US, with sharp interest rate hikes, will control inflation faster than the Europeans, who are just about to start with a 0.25 percent increase in interest rates.
In turn, these different strategies are based on assessments – and in the end they are not good at all: The USA assumes that it will quickly overcome a recession, which usually follows interest rate hikes. Europeans fear it will take longer because of the tangled situation in the eurozone’s diverse economies and the devastating war in Europe. That’s why they’re so cautious about rate moves.
Conclusion: A falling euro helps the economy in the euro area. The reasons for this give reason to think a little more. Especially in times of crisis, investors increasingly flee to the dollar. In this respect, the strong dollar also reflects the economic concerns that prevail in the pandemic and war-torn world.
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The article “A euro soon not worth a dollar? These are the consequences if our currency crashes” comes from WirtschaftsKurier.
