The euro is hovering close to parity with the dollar, falling to its lowest level in 20 years and even briefly touching a one-to-one exchange rate with the U.S. currency this week.
What does euro and dollar parity mean? It means the European and American currencies are worth the same amount. A currency’s exchange rate can be a verdict on economic prospects, and Europe’s have been fading.
Why is the euro falling? Many analysts attribute the euro’s slide to expectations for rapid interest rate increases by the U.S. Federal Reserve to combat 40-year highs in inflation. If the Fed raises rates more than the European Central Bank, higher interest returns will attract investor money from euros into dollar-denominated investments. Those investors will have to sell euros and buy dollars to buy those holdings. That drives the euro down and the dollar up.
Who wins? American tourists in Europe will find cheaper hotel and restaurant bills and admission tickets. The weaker euro could make European export goods more competitive on price in the United States. The U.S. and the EU are major trade partners, so the exchange rate shift will get noticed.
Who loses? American companies that do a lot of business in Europe will see the revenue from those businesses shrink when and if they bring those earnings back to the U.S. If euro earnings remain in Europe to cover costs there, the exchange rate becomes less of an issue.
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