The euro has touched parity for the first time in 20 years. Traditionally, in times of recession, the dollar tends to rise strongly, displaying its character as a haven asset. But never in the last two decades had it reached parity with the euro. In Mutuactives, They analyze several factors that make the current situation different:
1.- The war between Russia and Ukraine and its impact on world food and energy supplies affects Europe more negatively than the US The probability of a severe recession in the short term in Europe is more likely than in the US.
2.- Europe is facing a structural energy crisis due to the fragility of the gas supply that will be exacerbated by the Paris Agreement, which implies a reduction in the use of fossil fuels and makes the energy bill even more expensive. “Both of these factors will drain potential long-term growth by Old Continent vs. USA, which is self-sufficient. Being a long-term issue, it will have a structural impact on growth and substantially increase the divergence between US GDP and the euro zone. Hence the enormous incidence in the euro dollar ratio”, comments Ignacio Dolz de Espejo, director of investment and product solutions at Mutuactivos.
3.- The starting point of the US economy It was better than Europe before the crisis caused by inflation and the war in Ukraine, so it will probably be able to better withstand the slowdown that is taking place.
4.- The Federal Reserve is going to raise rates more than the ECB, making its debt more attractive. “The ECB will raise rates but is expected to do so much more gently for fear of a peripheral crisis even as inflation hits record levels. The gap between the policy of the Fed and that of the ECB seems destined to grow even more”, comments Dolz de Espejo.
Consequences for Europe
From Mutuactivos they point out that a weaker euro is a positive factor because it helps exporters. Either to be more competitive if they sell in euros or to receive higher profits if they sell in dollars.
However, it has a very negative effect on inflation. “Europe is a net importer of raw materials and the more the euro falls, the more we will have to pay for them. It is estimated that for every 10 percent depreciation of the euro against the dollar, an additional 0.2 percentage points are added to eurozone inflation in 2023,” says Dolz de Espejo.
Consequences for the US
US politicians have always defended that a strong dollar is good for the US due to its deflationary effect since, although the United States is independent at the energy level, it does not import more than it exports at all.
“A dollar on the rise while la FED raises rates has the risk of cooling down the economy too quickly. The strength of the currency may be hindering the work of the central bank and raising the risk of recession”, says Dolz de Espejo.
Unlike in Europe, the strength of the dollar It hurts US exports and the foreign currency earnings of US companies, which in turn threatens economic growth. Each percentage point of gain in the dollar causes a half-point impact on the earnings of the S&P 500. The main companies in the index are large exporters.
In this context, in Mutuactivos they estimate that the dollar has run a lot, not only because it is a refuge asset, but also because the energy crisis is causing long-term divergences in growth between the US and Europe and the ECB cannot keep up of the FED.
“The possibility of a multilateral agreement between central banks to try to rein in the dollar is unlikely. But it could become a great topic of discussion because the movement of currencies determines the actions of central banks and has a severe impact on the growth of countries”, adds the Mutuactivos expert.