Earlier this week, the euro was valued at 0.994 US dollars. However, this is not the lowest that the euro has been since the inception of the currency. In October 2000, it hit 0.841 US dollars. At that time, many had predicted that the euro would have had a short life.
From 2000 onwards, one cannot say that the euro did not have a bumpy ride, but between March 2006 and December 2014, it was consistently above 1.20 US dollars. In July 2008, it rose to 1.594 US dollars.
Taking a shorter time perspective, since December 2020, the value of the euro against the US dollar has decreased considerably and went below parity at the beginning of this month. From day to day, one can expect a certain currency volatility and so one needs to look at the trend that is emerging than at this day-to-day volatility.
What could be the reasons for this downward trend? The key one is the great uncertainty we have today in the global environment. We are still feeling the effects of the coronavirus, and there is the prospect of fresh measures in China to combat the Omicron variant of COVID-19.
In the meantime, there has been an outbreak of monkeypox, and no one really knows where it will lead us. On the political front, we have the Russian invasion of Ukraine with all the geopolitical tensions it has brought about.
There is too much at stake if the euro were to collapse
The impact of climate change is starting to be felt more severely and we still have to face resistance to take action to mitigate the risks of such change. Supply disruptions continue, be it of raw materials, of commodities and finished goods. To cap it all, we are facing a rate of inflation we have not seen for decades, with fuel prices increasing significantly.
To say that there is great uncertainty is probably an understatement. And when there is uncertainty, the US dollar is still the refuge that investors seek, and the euro weakens as a consequence of this flight into the US currency.
This week, Russia declared that it will not resume its gas supplies to Europe until the sanctions that have been imposed against it by Western countries are lifted.
As such, the Nord Stream 1 gas pipeline will not be operating at its full capacity. Some of the bigger EU member states are highly reliant on Russian gas. They have been seeking to stockpile energy in preparation for the coming winter and to seek alternative suppliers. However, this is not expected to be enough. There is the distinct possibility that some countries may have to ration energy supplies to industry, and this has brought with it the spectre of an economic recession. Currency traders are taking this scenario into account.
There are other considerations to make which could explain the fall in the value of the euro against the US dollar. The US economy is ahead of the eurozone economy on the road to recovery following the coronavirus. Moreover, the US has increased interest rates to tackle the increase in the rate of inflation before the eurozone. These two factors have shown that the US economy is more resilient, while the outlook for the eurozone economy remains bleak.
How things will pan out in the medium term remains to be seen, as a great deal depends on developments in China, Europe’s relationship with China, the resilience of Ukraine against Russian aggression, the internal political situation in the US, and the outcome of any discussion within the EU on an energy price cap.
I believe that the euro has the strength to recover its value as it did on a number of other occasions in the past. For the eurozone countries, there is too much at stake if the euro were to collapse.