Gaidulyan Nicole 31n

How the euro has performed recently

The article "Euro weakness in 2022" provides comprehensive insights into

the performance of the euro in the past year. With 2022 being widely regarded as
the "worst year in the euro's history," it is crucial to examine the factors that
contributed to the euro's decline and understand its implications.
Throughout the year, the euro experienced significant depreciation against the US
dollar, reaching a notable milestone in July when it hit a 20-year low. This decline
raised concerns and prompted a closer examination of the underlying causes.
Several key factors played a pivotal role in the euro's weakening. Firstly,
Europe's heavy reliance on Russian energy and the economic slowdown triggered
by the Ukraine invasion had profound effects. The resulting disruptions in trade,
coupled with soaring energy prices, imposed a severe strain on the euro area's GDP
and domestic demand. Consequently, the euro bore the brunt of these adverse
developments.
Secondly, the widening monetary policy gap between the European Central
Bank (ECB) and the Federal Reserve (Fed) contributed to the euro's depreciation.
While the Fed adopted a more assertive stance in response to mounting inflationary
pressures, signaling interest rate hikes, the ECB maintained a looser monetary
policy until July 2022. This divergence in approach led to a noticeable widening of
interest rate differentials between the two economies. As a result, investors shifted
their focus towards American assets, bolstering the strength of the US dollar and
exerting downward pressure on the euro.
Furthermore, the perception of the US dollar as a safe haven during times of
financial and political uncertainty played a significant role in the euro's
performance. In times of crisis, investors tend to flock to US assets, particularly
Treasury bonds, seeking stability and security. This increased demand for US
dollars during turbulent periods contributed to the strengthening of the currency
and further compounded the challenges faced by the euro.
It is important to note that the impact of a weak currency can have both positive
and negative implications. While a depreciated currency can enhance export
competitiveness and stimulate economic growth, it can also exacerbate inflationary
pressures and pose challenges for debt repayment, particularly in an environment
of disrupted supply chains and escalating import costs.
Overall, the euro's performance in 2022 was characterized by significant
weakness against the US dollar. The intertwined factors of economic disruptions,
monetary policy differentials, and the perceived safe-haven status of the US dollar
all contributed to the challenges faced by the euro. Understanding these dynamics
is crucial for policymakers and market participants alike as they navigate the
complexities of the global economy and strive for stability and growth.

A report is based on the article “ Euro weakness in 2022” Ethan Ilzetzki ,

Suryaansh Jain / 17 Feb 2023
https://cepr.org/voxeu/columns/euro-weakness-2022