Weak euro will further degrade our purchasing power | Money

It is an additional setback for consumers in the eurozone. Precisely now that inflation is already high, the weak euro is driving prices even higher. This is because international trade is often settled in dollars. And the stronger the dollar, the more euros have to be settled.

This means that a barrel of oil, for example, has become about 8 percent more expensive in recent weeks. And that is purely because of the lower exchange rate. The purchasing power of the citizens is therefore given an extra knock by the weak euro, or the strong dollar.

Parity – as it is called when both currencies are worth the same – will be reached soon, economists expect. It has been nearly twenty years since the dollar and the euro were worth the same, in December 2002.

It is impossible to predict how far the euro will fall. But it is clear that the European single currency could fall even further. This can be explained by interest rates and recession fears. The US economy is growing faster than Europe. But this rapid growth has a downside: inflation is rising rapidly.

To combat inflation, the Fed, the US central bank, is raising interest rates. Higher interest rates cool the economy somewhat, because less credit is provided to businesses and consumers. And if demand cools, prices may fall again.

The European Central Bank (ECB) is also more or less following this path. Here too, interest rates are rising to fight inflation. But the Fed is being a little more aggressive by raising interest rates more and faster. This makes the dollar more attractive to invest in and that pushes the price up.

There is also a fear of recession due to the war in Ukraine. Europe is particularly affected by this because we are very dependent on Russian oil and gas. This supply is being squeezed, which increases the chance of a recession sharply. The expectation is that the ECB will therefore be less generous with interest rate hikes. That would deepen the recession, the fear is.

Another factor is the dollar function as a safe haven. In times of uncertainty, investors flee to the dollar, the Japanese yen or the Swiss franc. That is happening now, giving the dollar an extra push.

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