Does the euro equal the dollar in value?

12/03/2015

Since the beginning of the year, the euro has lost a lot of value against the dollar; compared to the exchange rate a year ago, 22,5%. One euro is now worth $1,06, when a year ago it was worth a record $1,40. Financial markets and economists are already talking about a possible "parity" in which both currencies will have the same value. The last time the euro and dollar had the same value was in 2002. What is causing the exchange rate to fall? And can it be a problem?

The euro's weakness can largely be attributed to the policy of the European Central Bank. Last year, in May, ECB President Mario Draghi announced that the value of the euro was a "major concern" and that "all instruments" available would be used to revive the European economy. In September, the ECB lowered interest rates and announced that it would consider purchasing government bonds. On January 22, Draghi presented a plan: for nineteen months, 60.000 billion euros would be injected into the economy each month. That would mean a total monetary stimulus of 1,14 trillion euros. In short, this means that more euros will enter the market and, according to the law of supply and demand, the price falls when supply increases.

Adjustment of growth figures

Banks can sell government loans to the ECB. In return, banks must use capital for investments in companies or mortgages. This month, the debt purchase program has started and a Dutch television interview shows that the interest rates on several government bonds in several countries have gone down immediately.

The combination of the purchase program, a low oil price and a weaker euro has caused the ECB to adjust its economic forecasts for Europe to the upside. According to the latest estimates, the European economy will grow by 1,5% this year. In 2016, growth is expected to reach 1,9% and for 2017, an 2,1% is expected. Inflation will remain low: for this year it is expected to be 0%. However, for 2016 and 2017, higher inflation figures are expected: 1,5% and 1,8%, respectively.

abenomics

On the other hand, it is not uncommon for a central bank to inject millions into its economy. The US FED has injected more than 4 trillions of dollars (3,6 trillion euros) into its economy since the beginning of the crisis in 2008. In Japan, a similar stimulus package called Abenomics was launched, prompted by Japanese Prime Minister Shinzo Abe, injecting hundreds of billions into the Japanese economy.

The European advantage worries in Washington

grafiek wisselkoers Is the decreasing value of the euro a problem? Not at the beginning. The economic forecasts have been adjusted upwards because a cheaper euro is good for export. Eurozone products will be relatively cheaper for non-euro consumers, which gives European companies a competitive advantage, which in turn could have positive consequences for European exporters.

Incidentally, the euro is not the only currency that has lost value compared to the dollar. Since June of last year, the value of various currencies around the world has fallen.

Source: Freshplaza.es