For the first time since 2022, the exchange rates of the US dollar and the European currency equalized. Theoretically, this state of affairs will increase the competitiveness of European (including Dutch) products on world markets. However, in the short term, this will increase inflation in the eurozone and affect the welfare of the country's inhabitants.
Over the past year, the euro has depreciated by almost 15% against the US dollar. For now, American tourists in Europe will be able to afford more, and European tourists in the US will be able to afford less. How long this state of affairs will last remains to be seen.
Reasons for the depreciation of the European currency
During the last twenty years, the euro has always been more valuable than the US dollar. The maximum rate was in 2008: then for 1 euro you could get 1,60 US dollars. The sharp depreciation of the euro occurred in 2014, and since the summer of 2021, the fall of the European currency has resumed.
The following factors had an impact on the exchange rate stability of the euro:
US central bank policy
The United States of America is also experiencing problems associated with inflation. To reduce the rate of price growth, the US Central Bank raised the discount rate higher than in the EU. As a result, it has become more profitable for investors to invest in the United States. Demand for dollars increased, while for euros it decreased. This was reflected in the mutual exchange rate.
Investors' fears about the growth of the eurozone economy
The most powerful factor influencing the mood of investors is the activity of Russia. The war unleashed by this country against Ukraine demanded to accept a huge number of refugees, led to an increase in world food prices, and demanded the provision of financial and military assistance to Ukraine. In addition, the eurozone countries are forced to increase their own spending. Meanwhile, Russia continues to play with gas and oil valves of its pipelines. Investors are concerned about the provision of Europe with the necessary amount of energy resources.
It should be noted that the euro exchange rate also fell against the currencies of European countries that are not members of the monetary union. So, last year, 1 euro cost 1,09 Swiss francs, and now for the euro they give 0,99 francs. However, the position of the euro is significantly better than most of the world's currencies. Emerging-country currencies were hit harder.
The exception was the Russian ruble, which rose against the US dollar. However, the growth of the ruble is largely artificial. On the one hand, the Russian Federation continues to receive large foreign exchange earnings from the sale of energy resources. On the other hand, Russia's ability to make purchases on the foreign market and move funds is severely limited by sanctions. Therefore, the current exchange rate of the ruble against the dollar, and through it to other currencies, is artificial and extremely overpriced.
What to expect?
Most of the contracts for the supply of energy resources are denominated in US dollars. The cost of resources will hit eurozone companies using these resources. Other goods purchased outside the eurozone will also rise in price. In general, the fall of the euro will lead to higher inflation and lower living standards in the Netherlands. However, the current exchange rate of the euro against the dollar may change in favor of the European currency, which will reduce inflation. The fastest way to do this could be to raise interest rates by the European Central Bank.
Get more up-to-date information about life in the Netherlands in the section "News" our website.
Publication Date: 14.07.2022
