EUR/USD parity: cause for celebration for strong European exporters?
The euro (EUR) fell below parity with the U.S. dollar (USD) in mid-July. This means that for the first time in almost two decades, one euro was briefly worth less than one U.S. dollar. Although the EUR had weakened considerably against the USD during 2021 – by around 7% – this trend accelerated recently with the outbreak of war in Ukraine. From 24 February 2022, the EUR fell by around 10.5% versus the USD to reach parity on 14 July 2022.
„There are many reasons for the EUR weakness versus the USD.”
Philip Bold
There are many reasons for the EUR weakness versus the USD. The EU has been slower to recover from the shock of the pandemic, was slower to get started on the cycle of interest rate hikes, and is seriously affected by the supply situation in commodities and energy. On the other side, the USD is benefiting from its safe haven status during times of crisis amidst this economic and geopolitical uncertainty.
A ray of hope: strong European exporters (in particular Germany) will benefit from this EUR weakness versus the USD – or will they?
Unfortunately, the answer to this question is no. Exports of goods and services to non-eurozone countries generally account for a substantial proportion of GDP (around 20% in 2021). However, only a fraction of this (around 15%) goes to the U.S. A comparison to a broader trade-weighted basket of currencies is therefore more telling for an assessment of EUR competitiveness. The EER-42¹ exchange rate published by the ECB is an appropriate reference for this. It takes into account the weight of trade with the 42 most important trading partners of the EU. Against this basket of currencies, the EUR has fallen by only around 4% since the start of the war in Ukraine until reaching parity with the USD. The international competitive advantage gained by the EUR is therefore significantly lower than the change in the EUR/USD exchange rate suggests.
Furthermore, EUR weakness versus the USD brings a significant disadvantage: energy and commodities are generally quoted in USD. The dual burden of higher energy and commodity prices and the appreciation of the USD is likely to more than offset the slight competitive advantage from general EUR weakness. EUR weakness versus the USD is not therefore cause for celebration, even among strong European exporters.
¹ https://www.ecb.europa.eu/mopo/eaec/eer/html/index.en.html
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