The Dollar and Euro Are Near Equal: How Will the Currency Shakedown Hit American Wallets?

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After a slow decline in value over the past year, the euro (the European Union’s shared currency) is now worth about as much as the US dollar. Valued at roughly $1.22 at the end of May 2021, the euro now sits at just about $1the lowest it’s been in two decades.

The decreased price of the European currency could be a boon for American travelers funding foreign trips with dollars, as their money now buys more compared to prices in euros. The currency rate change will also impact American businesses: Although imports into the US are now cheaper, American companies exporting to Europe or competing with European imports may face tougher competition.

Why has the US dollar remained strong while the euro is declining in value? Europe is up against steep inflation just like the US, but the European Union has yet to raise interest rates and is under other economic constraints, stemming in particular from the war in Ukraine.

Learn why the value of the euro is falling and what it means for American travelers and shoppers.

What is the euro?

The euro (represented by the symbol “€”) is the currency for 19 of the 27 states in the European Union referred to as the eurozone: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.

The EU introduced the euro as a digital currency in 1999 and began rolling out coins and paper money in 2002. According to the European Central Bankmore than 340 million Europeans use the euro.

About €1.6 trillion in circulation as of June 2022, the euro is the second largest reserve currency in the world, trailing only the US dollar. After its introduction in 1999, the euro was worth less than the dollar for a few years, but has held a higher value consistently since 2003, reaching a high of near $1.60 during the summer of 2008.

Why is the euro losing value?

There are several factors at play here. To start, inflation is hitting Europe hard, with an expected 8.6% rate in June and no relief expected through the end of 2022.

While this economic outlook bears a striking resemblance to what’s happening in the US, with inflation rising 9.1% year-over-year as of June 2022, there are some stark differences.

The value of the euro has plunged in 2022.

Federal Reserve Economic Data

Economic shocks from the war in Ukraine, particularly related to rising gas and oil priceshave hit Europe harder than the US, and have many experts predicting an extended recession in Europe.

“Russia’s invasion of Ukraine is a seismic shock for the Euro zone, because so much of the European growth model has been predicted on cheap Russian energy. That’s over & done with. Recession & structural headwinds are coming,” Robin Brooks, chief economist at the institute of International Finance tweeted on Thursday.

Also, the European Central Bank has not yet raised interest rates in 2022 (though it plans to raise them 25 basis points in July) while the Federal Reserve has already raised rates three times, with another aggressive rate hike expected this month.

The Fed’s decision to raise interest rates in the US has had an indirect impact on the euro’s value. As American interest rates rise, so does the value of interest-bearing accounts in the US, making them more attractive to investors globally.

As more investors convert euros into dollars to invest, the value of the euro drops. This has helped strengthen the US dollar throughout 2022, while weakening the euro. In fact, the Federal Reserve’s Real Broad Dollar Index — an inflation-adjusted valuation of the US dollar — is at its highest point since its creation in 2006.

How will a weaker euro impact Americans?

The US is a major trading partner with Europe, and while the weaker euro should bring price discounts on imports for American consumers, it will make American products more expensive for European consumers. A continuing advantage for the dollar over the euro might lead to a heightened trade imbalance and hurt the economic output of American businesses.

American businesses and workers that operate in Europe and are paid in euros will also see their incomes decrease, if they are converting their European earnings back to dollars.

In the larger economic picture, a recession in Europe, especially one that involves rationing of gas and energy, could lead to a global recession, of which the World Bank has recently warned. In its June Global Economic Prospects reportPresident David Malpass remarked that even “if a global recession is averted, the pain of stagflation could persist for several years — unless major supply increases are set in motion.”

Will a weaker euro save Americans money when traveling to Europe?

It certainly makes the math of converting dollars to euros a lot easier! A €250 train ticket will cost you about $250. (Last June, that same ticket would have cost you $305.)

A less valuable euro basically means a roughly 15% discount for Americans using dollars to buy things in Europe, compared to last summer. For example, in 2021, $100 would only get you about €82 worth of goods or services. Now, that same hundred bucks can get you €100 worth.

Reuters reported on Friday, “American tourists were thronging Paris’s Avenue Montaigne” on shopping sprees due to the weak euro. It also noted that there was a four-fold increase in tourism spending in Europe this year in June compared with 2021.

If you’re planning a trip to Europe, you’ll want to use a credit or debit card that does not change a foreign transaction fee in order to get the most from the discounted euro. Some cards will charge 3% to 5% for every transaction, taking bites out of your conversion discount.

The bad news? Prices might be cheaper for Americans once you get to Europe, but flying there has been difficult due to increased demand and a lack of preparedness from a tourism industry rebounding from the COVID-19 pandemic. According to NPR“passengers are encountering chaotic scenes at airports, including lengthy delays, canceled flights and headaches over lost luggage.”

What about buying European products online?

Any websites that use the euro as their accepted currency will essentially be cheaper for Americans converting dollars to make purchases, exactly as the currency conversion discount (compared to last summer) applies to goods and services bought in person.

For customers in the US, the weaker euro could also lower prices on imported goods from Europe, regardless of whether you purchase them in stores or online.

What comes next for the euro?

The biggest impact so far in the decline of the euro might be psychological. The rise of the euro as a competitor to the dollar has been an important political project for the EU. We its 20th anniversaryEuropean Parliament President David Sassoli called the euro “a condition for protecting and relaunching the European economic, social, and political model in the face of the transformations of our time.”

As its value plunges in 2022, the euro could lose the confidence of European investors, leading to a longer term challenge for the economic stability of the European Union.

For more information on the current state of the economy, learn why inflation is so high in the US, how to prepare for a recession and which states are sending new stimulus checks to residents.

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