Dollar reaches parity with euro for the first time since December 2002

Updated July 27, 2022

The European currency weakens against the background of the strengthening of the U.S. dollar.

The euro exchange rate against the U.S. dollar on the international Forex market fell by 0.39% to $1.0000, according to trading data. The last time the euro was equal to the dollar was 20 years ago, on December 6, 2002.

The euro was put into circulation on January 1, 1999 and initially traded more than the U.S. dollar. The euro first fell to parity with the dollar in December 1999, less than a year after the currency was created. Then there were periods of volatility, but after reaching parity in 2002, the euro began to rise in 2003 and continued to outperform the dollar.

The weakening of the European currency against the dollar is associated with rising rates in the U.S. and fears of an economic downturn. Foreign exchange market participants also win back the uncertainty in the situation with the supply of energy resources to the eurozone. In turn, the dollar is strengthening against the background of the Fed's tough policy on fighting inflation, which has reached a maximum in more than 40 years.

In addition, the depreciation of the euro reflects changes in the rate differential between the Fed and the ECB. Over the past three months, the Fed has increased rates by a total of 150 basis points, while the European Central Bank has kept rates unchanged.

The ECB is still keeping its funding rate at zero, fearing that it will further complicate the lives of corporations and the private sector in an era of rising borrowing costs. At the same time, inflation in the EU beats historical records. According to Eurostat, in June, annual inflation in the euro area reached a record high in history and amounted to 8.6%. The delay of the European regulator in the fight against price pressure in the economy only exacerbates the situation, depreciating the national currency.

The prospects for further dynamics of the euro/dollar pair (EUR/USD) in the near future will be closely linked to energy supplies. In the worst-case scenario, the euro could fall to $0.95, analysts predict.

It is possible that the euro will continue to weaken and for some time the euro/dollar pair will go under the $1.00 level. However, if the inertia of the ECB's policy continues, and geopolitical tensions do not dry out, there will be an objective risk of a further collapse of the euro towards the $0.8 level.

Nomura International strategist Jordan Rochester expects the euro to fall to $0.98 by August. Analysts at ING also forecast a downside scenario, with the euro dropping to $0.9545 over the next four weeks.

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Tags: dollar, euro, eur/usd, parity