Home News Euro Falls to Parity with the US Dollar for the First Time in 20 Years

Euro Falls to Parity with the US Dollar for the First Time in 20 Years

by internationalbanker

By Cary Springfield, International Banker


On July 13, the euro plunged to an intra-day low of $0.9998, its lowest level against the greenback since December 2002, meaning that it was briefly worth less than the US currency. And although it rebounded sharply to above $1.01 in the afternoon, it has been unable to hold this level, weakening once more towards near-parity on July 14 and raising significant concerns over the health of the eurozone economy over the coming months.

Since its launch in 1999 as the single currency for the 11 countries that made up the European Economic and Monetary Union at the time, the euro has spent much of its initial life trading below parity against the dollar, reaching a nadir of $0.82 in October 2000. But from late 2002 onwards, it has traded continuously above the dollar and even strengthened to as much as $1.60 in July 2008. But virtually throughout 2022, the eurozone’s single currency has conceded much of its ground, dropping by more than 12 percent against the dollar since the beginning of the year to finally reach the key psychological level of parity on July 13.   

So, why has this been the case? Primarily, the euro’s weakness can be explained by high energy prices in Europe. While much of the world has been struggling with $100+/barrel oil prices, Europe has been particularly exposed due to its massive dependence on fuel supplies from Russia—certainly more than the United States. The European Union (EU) was receiving approximately 40 percent of its gas from Russia prior to the war in Ukraine. And with Russian fuel proving crucial in powering much of Europe’s industrial activity and growing concern over the possibility of Russia curtailing its energy exports to the continent as its military presence in Ukraine continues, there are growing fears that the eurozone will plunge into a deep and prolonged recession.

Indeed, June saw Russia repeatedly cut gas flows to European countries, including Germany, France, Italy, Poland and the Netherlands. More recently, Russia initiated an extended shutdown of Nord Stream 1, which supplies gas to Germany through the Baltic Sea, until July 21 as it carries out maintenance work on the pipeline. But there are growing fears within Europe that this shutdown might be extended beyond the scheduled 10-day window, and a crisis of gas rationing and skyrocketing energy bills could well emerge during the European winter. “We cannot rule out the possibility that gas transport will not be resumed afterwards for political reasons,” Klaus Mueller, the head of Germany’s energy regulator Bundesnetzagentur, told CNBC on July 5.     

The growing divergence in the trajectory of interest-rate policies between the European Central Bank (ECB) and the U.S. Federal Reserve (the Fed) has also contributed significantly to the euro’s recent weakness. While the ECB has refrained from lifting rates to date—although there is much evidence to suggest its first 25-basis-point hike will be approved at its next meeting on July 21—the Fed has instead been aggressively boosting US interest rates since March. This has helped to strengthen the dollar to such a degree that the US Dollar Index, which measures the greenback against a basket of six peer currencies, surged to a 20-year high in June. In turn, demand for dollars has usurped that of euros as investors have sought to capitalise on comparatively higher rates of return being offered in the US—and the euro has thus plummeted further against the dollar.

The pressure is now on the ECB to raise interest rates to combat this period of record-high inflation—as well as boost its support for the euro—but doing so will only exacerbate the risk of sending the eurozone into recession. Holding off on rate hikes, however, raises the risk of inflation heading towards double-digits and a further decline in the euro’s value. “Gas rationing, stagflation, an expected recession, they are all good reasons to be bearish on the euro,” Stuart Cole, the head macroeconomist at Equiti Capital in London, explained to The Guardian, adding that such factors would make it more difficult for the ECB to lift interest rates and thus exacerbate the interest-rate divergence with the US.

Could the euro continue to fall much further below parity, then? It’s certainly possible, especially if high inflation rates continue to stubbornly pervade the region. Indeed, Deutsche Bank’s global head of FX research, George Saravelos, recently stated in a note that the euro could well trade within a $0.95-$0.97 range “if both Europe and the US find themselves slip-sliding into a (deeper) recession in Q3 while the Fed is still hiking rates”.

Jane Foley, head of FX strategy at Rabobank in London, has expressed similar concerns. “A break of parity may have been delayed by some market participants attempting to protect a sea of options being triggered below that level, but it is not difficult to put together a case in which the euro could fall further,” according to Foley. “This very much depends on the gas flow from Russia into Germany and whether there will be rationing over the winter.”

On a positive note, Canada issued a “time-limited and revocable permit” to send a turbine that Siemens Canada repaired back to Germany—a turbine that Russia has said is key to resuming gas supplies via Nord Stream 1. “Absent a necessary supply of natural gas, the German economy will suffer very significant hardship and Germans themselves will be at risk of being unable to heat their homes as winter approaches,” said Jonathan Wilkinson, Canada’s minister of natural resources.

As such, the resumption of gas supplies as Russia initially scheduled should lend considerable support to the euro. “In the short term, the turbine will allow Germany and other European countries to replenish their gas reserves, increasing their energy security and resiliency and countering Russia’s efforts to weaponize energy,” according to Ned Price, spokesperson for the US Department of State.


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