Topic: How can we explain the actual rate of exchange dollar/euro close to parity?

The exchange rate between the euro and the dollar has fluctuated over the last 22 years, with
the euro surpassing its all-time high of around USD 1.58 in 2008. The euro then began to
fluctuate between 1.4 and 1.2 USD between 2012 and 2014. Then, from 2015 until the first half
of 2022, the exchange rate was maintained between 1.2 and 1.01 USD. In July 2022, a rather
unfavourable euro-dollar exchange rate was observed, hitting the parity with US Dollar, having a
1:1 exchange rate. Then in September 2022, the euro also experienced its lowest fall in 20 years.
It is also worth noting that the dollar gained strength not only against the euro, but also against
other currencies around the world, due to various factors that will be discussed in this essay.

On the one hand, the rise in inflation is mainly due to the injection of liquidity that economies
had due to the pandemic, and subsequently, the war between Ukraine and Russia also
influenced this factor. As a result, the FED has opted for a monetary policy of constant interest
rate hikes, with one of the most aggressive since 1994 set for 2022, with the aim of curbing
inflation, which is at its highest level in more than 40 years (World Economic Forum, 2022). In
addition, this increase in interest rates will have several effects that may contribute to the
depreciation of the euro, such as the economic slowdown in the United States, which may have
a negative impact on European exporting companies, as it will not make sense to expand their
productive capacity, investments will decrease and there will be a significant drop in
employment (Petersen, 2022).

On the other hand, the war between Ukraine and Russia has had a significant economic,
political, and social impact on the eurozone, which has affected the price of the euro against the
dollar. First, the European Union has imposed some sanctions against Russia as a result of this
war; however, Russia is still the largest supplier of gas and oil to the European Union, which has
meant an energy crisis, causing an increase in the inflation rate and therefore the fear of an
economic recession in the European markets (Barria, 2022). It also showed that the European
financial system is still vulnerable to external shocks, and although the ruble is not a hard
currency like the euro, it could be very important in the devaluation of the euro due to
economic and geopolitical factors (Aliu, Haskova, & Bajra, 2022).

Thanks to all the above, it can be said that the euro has shown a significant devaluation
compared to previous years, which affects people's purchasing power due to the fact that
imported products are becoming more expensive, such as the price of fuel, which exceeded
historical prices in 2022; thus, aggravating the inflation problem and creating more expectations
about it. On the other hand, to combat inflation in the eurozone, the European Central Bank has
raised interest rates to bring inflation back to 2% in the medium term and try to stabilise prices.

References
Iacursi, G. (2022, July 12). The euro hit parity with the U.S. dollar for first time since 2002. Here’s
how travelers can take advantage of the exchange rate. Retrieved from The euro hit
parity with the U.S. dollar for first time since 2002. Here’s how travelers can take
 advantage of the exchange rate: https://www.cnbc.com/2022/07/12/euro-and-us-dollar-
near-parity-heres-what-that-means-for-travelers.html
Aliu, F., Haskova, S., & Bajra, U. (2022). Consequences of Russian invasion on Ukraine: evidence
from foreign exchange rates. The Journal of Risk Finance.
Barria, C. (2022, July 12). El euro llega a su nivel más bajo en 20 años frente al dólar: qué
consecuencias tiene la histórica paridad de las monedas. Retrieved from El euro llega a
su nivel más bajo en 20 años frente al dólar: qué consecuencias tiene la histórica paridad
de las monedas: https://www.bbc.com/mundo/noticias-62129903
World Economic Forum. (2022, June 22). US makes most aggressive interest rate hike since
1994. Retrieved from US makes most aggressive interest rate hike since 1994:
https://www.weforum.org/agenda/2022/06/rates-inflation-federal-reserve-united-
states/
Petersen, T. (2022, March 21). Interest Rate Hike by the Fed – What Does it Mean for Europe?
Retrieved from Interest Rate Hike by the Fed – What Does it Mean for Europe?:
https://globaleurope.eu/globalization/interest-rate-hike-by-the-fed-what-does-it-mean-
for-europe/