Time to plan that Eurotrip... Yesterday, one euro was worth exactly one US dollar, and briefly less than the USD. The euro had been more valuable than the dollar for two decades (almost its entire existence). But the currency has lost more than a tenth of its value this year, while the dollar has appreciated relative to other top currencies. What’s driving it:
- Higher interest: Investors have ditched euros as comparatively higher interest rates in the US strengthen the dollar (higher interest = $$ is more expensive to borrow).
- Higher growth: The euro selloff continued last week as Russia threatened to cut Germany’s gas supply, hurting Europe’s economy. While the US’s economic growth outlook isn’t great, Europe’s is worse.
- Higher confidence: The USD’s stable rep has long made it the world's reserve currency for international purchases, and demand is climbing.
Cheaper chianti in Kansas… pricier Pop-Tarts in Palermo. The euro’s drop has global implications. The discounted euro makes it cheaper for Americans to frolic around Rome and Paris ($1 buys you more euros). But it makes it pricier for Europeans to import US products — and less lucrative for Italians to export their prosciutto. A stronger dollar makes investing outside the US less appealing to Americans, since returns in other currencies translate to fewer $$.
Being too strong can be a weakness… A strong dollar’s great for Aperol-spritz-sipping Americans abroad. But if the dollar keeps appreciating, US investment and exports could dip as global investors get priced out. American corporate earnings could also suffer, since 40% of S&P 500 revenue comes from abroad. Some analysts expect the euro to lose another tenth of its value before stabilizing.