In the currency market, July 2022 will be remembered as the month when the euro and the dollar crossed the historic parity threshold. Lower economic forecasts for the eurozone, amid soaring inflation, a political crisis in Italy and fears of an immediate recession if the Nord Stream I pipeline is shut off, were reflected in the weakening of the European common currency. On 14 July, . This was the lowest exchange rate since 2002.

Since then, the euro's value against the dollar has risen relatively, but is still close to parity. On 10 August, the euro was trading at $1.0234. The European Central Bank's (ECB) still allowed the European currency to stay above the parity threshold.

However, forecasters are not optimistic that the euro will rise significantly against the US currency. Monex forex analysts do not rule out the possibility that the rate will once again hit parity by the end of August. According to them, the price could end the year at around $1.02, and it would take until the end of 2023 for it to move painfully slowly towards $1.10.

No upward trend

Analysts at ING believe that the euro is far from cheap, even if it is weakened. On 16 March, when the euro was still worth $1.10, they said that the European currency was overvalued by 9%. On 4 August, they said that the euro was still overvalued by about 5%.

This overvaluation of the euro is likely to continue as long as economic factors in the euro area do not improve. Only an easing in energy prices could unblock the situation, according to ING analysts. This somewhat dampens hopes of an upward trend in the price by the end of the year.

For its part, the greenback is benefiting from an economic outlook that is proving better than expected, defying prior warnings of a recession in the US economy after it recovered all the jobs lost during the pandemic in July. Moreover, the US is facing inflation caused by a demand shock, in contrast to Europe, which is experiencing a supply shock due to its high exposure to the consequences of the war in Ukraine.

The dollar is generally strengthening

In addition, the US Federal Reserve (Fed) has started monetary tightening much earlier and faster than the ECB. The situation is therefore benefiting the value of the dollar. This is reflected in the level of the DXY, the US Dollar Index, which measures the value of the dollar against a basket of six foreign currencies, including the euro. As the dollar rises against the other six currencies, the DXY increases. With the euro weighted at 57.6% in the DXY, the index should remain supported at high levels.

Therefore, a strong dollar does not make foreign consumers happy, given that almost half of global trade is settled in dollars. The impact is clear for producers, who depend on imported goods. This is detrimental to economic growth, as more expensive imported goods make it difficult for companies to replenish their stocks.

The bill is also rising for governments whose debt is denominated in dollars. The stronger the dollar becomes, the more difficult it will be for them to repay their debts. This is not to mention the fact that some countries have exhausted most of their dollar reserves. This is one of the reasons why Sri Lanka recently experienced an unprecedented economic crisis.

Risks of default

Sri Lanka is not the only country affected. On 20 July, the International Monetary Fund (IMF) warned that 53 emerging countries, representing about 18% of the world's population, face a risk of default.

It is not only government spending that is affected by the high value of the euro. This is attracting more and more investors to switch from local currencies to the US market, creating capital flight.

However, the situation offers a consolation prize: American economic operators could be encouraged to import more European products, taking advantage of the exchange rate. This could slow the decline in the euro area's trade balance.

This story was first published in French on . It has been translated and edited for Delano.