1 euro = 1 dollar

Each country has its own currency but, in the case of the European Union, 19 member countries share the same currency: the euro. Since its appearance in 2000, the euro has been a stronger currency than the US dollar (one of the most widely used currencies in the world), among other things because it has been used to buy and do business in several countries.

However, in recent months the price of the euro has fallen to parity with the dollar: now a dollar and a euro are worth the same thing. This is the first time this has happened since 2002.

The euro devalued by 15% last year. At the beginning of 2022, one euro was equivalent to 1.13 dollars, but in February the war in Ukraine arrived and the euro began to suffer. Following the conflict between Russia and Ukraine, Europe is facing an economic crisis which is affecting the value of its currency.

The causes

On the one hand, the inflation it took off in both Europe and the United States after the outbreak of war. Ahora los precios están undergone rápidamente y alcanzando niveles record: in the Eurozone, the inflation disappeared hasta el 8.1% interanual en el mes de mayo (lo que signifies that los products son un 8% más caros que en el mismo mes del past year).

This price increase can be explained, among other things, by the economic crisis that occurred after the Russian invasion of Ukraine. The war caused a energy crisis worrying, and many countries do not know if they will be able to count on Russian gas supplies for next winter.

Russia is one of the main gas suppliers on the European continent and uses this advantage to put pressure on other countries. For the past few weeks, the Russian government has been carrying out maintenance work on the Nord Stream 1 gas pipeline, one of the largest in Europe, which supplies gas to Germany and other EU countries.

If Russia decided to cut off the supply, the consequences for the economy of European countries would be very serious. Prices would skyrocket and many people could not afford basic goods and services.

10 - 01 - 2013 / Eur banknotes / Currency - Banknote / 5 Eur 10 Eur 20 Eur 50 Eur 100 Eur 500 Eur / Photo: Llibert Teixido

100 and 500 euro banknotes.

Llibert Teixido / LV

The actions of central banks

Central banks are responsible for determining the interest rate of money, that is to say: the value it has on the markets. In this way, they can correct imbalances such as inflation, unemployment or liquidity crises. Interest rates are used to determine the price of a currency.

Faced with inflation and the energy crisis, the central banks of Europe and the United States have taken various measures which explain the parity between the euro and the dollar. In the US case, the US Federal Reserve (Fed) has set interest rates at 1.75% so that its currency does not lose value.

However, the European Central Bank (ECB) will wait until the end of July to make a decision on the matter. This decision, slower and less forceful than that taken by the United States, also influenced the fall of the euro.

Consequences of the devaluation of the euro

The parity of the euro with the dollar will favor exports from the European Union, since the products will be sold at a cheaper price. Moreover, the Eurozone will be seen as an attractive destination for international tourism, as its currency is cheaper.

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The depreciation of the euro can favor foreign tourism in European countries.

Anthony DELANOIX/Unsplash

However, parity will also make imports more expensive, especially raw materials. Among them, oil or liquefied gas from United Stateswhich is quoted in dollars and whose import into European countries will now reach record levels of its price.

On the other hand, the rise in the price of the dollar has consequences in other parts of the world, such as in Latin America. In countries like Argentina, Chile or Colombia, their currencies are also losing value against the US currency. As a result, there are sharp price increases and paying debts in dollars becomes more expensive.

There is a solution ?

Currently, two alternatives are being considered for the value of the euro to rise again. On the one hand, the war in Ukraine should end soon, which seems unlikely (at least not yet).

The second alternative is for interest rates to rise in the euro zone. At the end of the month, the council of the European Central Bank will meet to raise rates for the first time in eleven years, to 0.25% as expected. This could help slow down the value of your coin somewhat.

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