Euro falls to parity with the dollar for the first time in two decades

Jul 13, 2022, 1:10 PM · by Nathan Reeves

The single currency dropped to one dollar as energy fears in Europe and a faster pace of US rate increases pushed investors toward the greenback.

The euro briefly fell to parity with the US dollar this week, touching one-for-one for the first time since the early 2000s.

The move reflects a combination of factors. The Federal Reserve has raised interest rates aggressively this year, while the European Central Bank has not yet started. The gap in rates makes dollar assets more attractive to investors.

Europe also faces a specific risk: its dependence on Russian gas. Flows through a key pipeline have been reduced, and there are fears supplies could be cut further ahead of winter. An energy shortage could push the eurozone into recession, weighing on the currency. A weaker euro has mixed effects:

Exports from the eurozone become cheaper and more competitive
Imports, especially energy priced in dollars, become more expensive, adding to inflation
European tourists pay more when travelling to the US

The ECB is expected to raise rates at its meeting later this month, which could offer some support. But many analysts say that as long as the energy outlook remains uncertain, the euro will struggle to recover.

For the broader currency picture, the moment is symbolic. The dollar's strength this year has been one of the defining features of global markets, and reaching parity with the euro underlines that trend.