The European currency is trading below parity with the greenback for the second time this summer, touching a new low in nearly twenty years on Tuesday, at 0.9901 dollars.

How far will this depreciation cause the euro to plunge?

On this side of the Atlantic, can the fall in the euro have a concrete impact on our wallet?

Rates “very in favor of the dollar”

This depreciation is due to the strengthening of the dollar, supported by the monetary policy of the central bank of the United States (Fed).

Unlike its European counterpart, the Fed showed much earlier its determination to continue its rate-tightening policy to fight inflation.

High interest rates in the United States make it more profitable to hold dollars, which attracts investors and makes the currency appreciate.

For its part, the European Central Bank (ECB) raised its rates for the first time, but its long-term intention is not considered sufficiently clear on the markets, and is creating a blur on the euro.

“The ECB is walking on eggshells.

It cannot let go completely by raising rates because it is afraid of causing a sovereign debt crisis in the most indebted countries of the euro zone", defends Eric Dor, director of Economic Studies at the IESEG School of Management. .

The Fed, it, “is not confronted with this problem”.

As a result, spreads remain “very much in favor of the dollar,” he concludes.

Imported products more expensive in the euro zone

In addition, the war in Ukraine and Europe's dependence on Russian hydrocarbons reinforce "growing" uncertainty in the eurozone, he adds.

Nearly half of the products imported into the euro zone are invoiced in dollars against less than 40% in euros, according to the European statistics office Eurostat.

This is for example the case of many raw materials, starting with oil and gas, the prices of which have already risen in recent months in the context of the war in Ukraine.

But with the depreciation of the European currency, more euros are needed to buy imported products in dollars.

Imported products lose competitiveness and are therefore more expensive.

This contributes to accelerating inflation.

As the increase in wages does not follow, the purchasing power of households is threatened.

Incidentally, the depreciation of the euro against the dollar will slow down European tourism, especially in the United States.

As they need more euros to pay the same amount in dollars, the bill for their stay increases in the United States as well as in countries whose currency is pegged to the dollar (Qatar, Jordan, etc.).

Conversely, American tourists gain from the exchange: during their stays in the euro zone, they can consume more with the same amount of dollars.

Explosion of costs for companies

The effect of the fall in the euro varies according to the companies' dependence on foreign trade and energy.

"Companies that export outside the euro zone benefit from the depreciation of the euro because their prices are more competitive [once converted into dollars], while companies that import find themselves penalized", summarizes Philippe Mutricy, director of studies of the public bank Bpifrance.

On the other hand, for companies dependent on raw materials and energy and which export little, such as local craftsmen, the costs explode.

The big winner of the fall in the euro is the manufacturing industry, which exports its products abroad, in particular aeronautics, automobiles, luxury goods and chemicals.

“Facilitate debt repayment”

Theoretically, the depreciation of the euro makes prices more competitive outside the euro zone and therefore stimulates exports of European goods and services abroad.

This could cushion the impact on growth of the rise in commodity prices, especially in countries whose economy is driven by exports, such as Germany.

For the repayment of the debt of European countries, the impact is less obvious.

More growth can “facilitate the repayment of the debt”, explains Isabelle Méjean, professor at Sciences po Paris, provided that the markets consider the European debt as sufficiently safe and that the interest rates remain low.

But for States that have issued bonds denominated in dollars, a depreciation of the euro against the dollar increases the cost of repayment.

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  • Economy

  • Euro

  • Dollar

  • purchasing power

  • Change

  • Inflation