Euro reaches parity with dollar for the first time in 20 years

BRUSSELS: The euro and the dollar have reached parity for the first time in 20 years, signalling the market's assumption that the European economy is heading for a deep recession due to Russia's invasion of Ukraine, media reports.

Today, 1 EUR equals 1 USD. The shift means European companies and consumers will pay more for the goods and services they import, while European exports become immediately cheaper in international markets. The euro has experienced a dramatic loss of value since early February when it was worth over $1.13.

According to the media reports, the fall accelerated in recent weeks as fear spread that Russia, the EU's main energy provider, would completely cut off gas flows in retaliation for Western sanctions.

All eyes will be on the euro to see if it falls below the American dollar. The last time this happened was in November 2002, when the euro was worth $0.99. Since then, the euro enjoyed a steady rise, reaching almost $1.60 in the summer of 2008, when the Great Recession was wreaking financial havoc across the US.

But Russia's full-scale attack against Ukraine has turned the tables around, taking a heavy toll on the EU's economy. The invasion has upended energy markets and sent gas bills soaring to all-time highs.

The sudden shock has triggered record-breaking inflation across the eurozone, with an 8.6 per cent figure in June and a gradual slowdown in economic activity. The combination of both factors has brought back the spectre of stagflation, a dangerous mix that depresses growth while goods remain excessively expensive for consumers and companies.

The European Central Bank has already hiked the interest rates in a bid to tame inflation and plans to continue doing so as the situation further deteriorates. But some analysts have criticised the ECB for moving too late compared to its counterparts in the US, the UK and Canada.

This is what the fall in the Euro is ultimately about. Markets price a Fed hiking cycle - including hikes already done - of 260 bps through end-2024 (black). Over the same period, they price ECB hikes of 210 bps, even as the Euro zone is tipping into recession. Just can't happen. pic.twitter.com/lDbBjP01Iq

— Robin Brooks (@RobinBrooksIIF) July 12, 2022

"Maybe on some level, parity of Euro versus US Dollar is just a number," Robin Brooks, chief economist at the Institute of International Finance (IIF), wrote on Twitter.

"But markets are made up of human beings who happen to care about levels, which gives parity a special psychological significance, not least since we haven't seen (parity) in 20 years. This is a big deal."