- On 12 and 13 July the euro reached parity with the dollar for the first time since 2002.
- On 13 July US inflation of 9.1% for June was published.
- A weak euro makes energy dearer and dollar-priced raw materials too, but favours exporters outside the euro area: it is worth knowing how much the exchange rate weighs in results.
On 12 and 13 July 2022 the euro reached parity with the dollar for the first time since 2002: one euro was worth one dollar. On 13 July US inflation of 9.1% for June was also published. Two data points that, together, illustrated a context in which the European currency was losing value against the American one at a time of strong economic and energy tension.
Exchange rates seem a matter for specialists, but they affect daily life. They determine what a trip, an imported component or an energy bill invoiced in dollars costs; they influence what an exporter earns when converting sales into euros; and they change the euro value of any asset quoted in another currency. When a symbolic threshold such as parity is crossed, it is talked about more, but the economic effect is continuous.
What parity means
An exchange rate of one to one means that one unit of a currency buys exactly one of the other. It is a psychological reference as well as a technical one, and the euro reaching it for the first time in twenty years was a milestone that markets followed very closely.
The exchange rate reflects, to a large extent, expectations about each area’s economy and interest rates. When an economy seems stronger or its rates are higher, its currency tends to attract capital. Parity between the euro and the dollar showed that, at that moment, markets viewed the European situation with more caution, marked by energy dependence and by the war.
Who gains and who loses
A weak euro makes energy and dollar-priced raw materials dearer, but favours those who export outside the euro area. Their products become cheaper for the foreign buyer, whereas those who import or travel to dollar areas pay more for the same thing. Each company should know in which currencies its costs and income are denominated, something that is sometimes only discovered when the exchange rate moves.
There are no absolute winners or losers: it depends on each one’s position. An importer of components in dollars sees costs grow; an exporter to the United States may gain competitiveness; a European tourist in a dollar destination sees the trip become dearer. And a family with savings in an international portfolio may see the euro value change even though the assets have not changed in their own currency. It is worth remembering that an exchange rate can reverse as quickly as it moved: parity is neither a floor nor a ceiling, but a point on a trajectory.
What to review
For anyone with income or assets in dollars, the exchange rate matters. Companies with purchases or sales in foreign currency should know what part of their result depends on the exchange rate and whether they need to hedge it, and families with spending or investments in dollars should bear in mind that their euro value can vary even if nothing else has changed.
A simple review consists of listing all items, of income and expense, denominated in foreign currency, estimating their weight in the result and simulating what would happen if the exchange rate moved 10% in either direction. If the impact is significant, hedging, price adjustments or a change of supplier can be studied, with the help of a financial adviser. If hedging is chosen, the cost of the cover must be compared with the risk avoided; not hedging is also a decision, and should be taken with the numbers in view.
Currencies are not a detail: they are part of the result, even if unseen.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
