King Dollar
Parity
This morning, for the first time in 20 years, it was possible to buy a euro with a single dollar. A one-to-one exchange rate is known in the financial world as parity. At the turn of the year, one had to pay 1.13 dollars to buy a euro. At the beginning of 2021, it was 1.23. The dollar is on a huge upswing, which is affecting the most important financial market – the currency market – these days.
All the plagues of Egypt
A growing fear that central banks will raise interest rates further to fight inflation, just when fears of an impending recession are spreading. An inverted yield curve, sharp falls in commodity prices, and slumping consumer spending are not helping to lift sentiment on the stock markets. In the background, the devastating war in Ukraine seems to have no end in sight and an energy crisis in Europe is looming, should the Russians permanently cut off gas supplies to Western Europe.
Dominant status
All this has contributed to the unprecedented rise of the world’s most important currency. The dollar has traditionally been a popular refuge among investors in times of turmoil. After all, the United States is by far the largest and most liquid market. And because the dollar still has a very dominant status, it is also the safest. A flight into dollars is therefore not so strange.
No longer behind the curve
Another factor is that the central bank of the United States has been busy for months raising interest rates and has started to tighten its broad monetary policy. In this respect, the United States is far ahead of the European Union. Whereas it was long claimed that the Federal Reserve was behind the curve, this now seems to be less and less the case. Certainly in view of the now lowered inflation expectations.
Energy-dependent
In the European Union, inflation appeared for a long time to lag behind that of the United States, but that gap has now been more than closed. Thanks to the Russian threat to possibly cut off the gas supply to the European Union altogether. The European Union has made itself very dependent on imports of Russian gas in recent decades. The business model of the German economy in particular, but also that of Italy, seems to be based on it. In contrast, the United States, partly as a result of the shale revolution, is largely self-sufficient when it comes to energy.
Energy crucial
In the coming period, energy will therefore prove to be the crucial factor in the further development of the dollar against the euro. Is the European Union’s dependence on Russian gas structural or is the European Union capable of wresting itself from the clutches of the Russian bear? As long as this is not the case, there could be talk of a fundamental restructuring of the world economy. A restructuring that will not benefit the European Union. The United States is in the hot seat in this energy crisis, while the European Union can only hope for a happy ending.
Climate change good for something
When policies are based on hope, mistakes have been made in the past. Decades of carelessness regarding our energy dependency are now exacting a heavy price. How high that price will be, depends in part on the weather gods. A harsh winter may put the hard-won consensus in the European Union under severe strain. Perhaps global warming will still be good for something and a mild winter will follow.
“Adjusted for currency differences”
For the time being, the euro is weakening further and further. That does not help to fight inflation either. After all, many commodities are paid for in dollars. For the United States, in particular, the strong dollar is an advantage. It is the helping hand the Federal Reserve needs to fight the inflation specter. The sharply higher dollar is, however, disadvantageous for the large American multinationals. Profits made abroad are lower, converted into dollars. In the coming weeks, the term “adjusted for exchange rate differences” will be used frequently in the publication of the many quarterly results.
