The Lebanese people have been struggling to find a stable exchange rate for both the USD and the Lebanese Pound (Liras) since 2019.
Accordingly, they had to find another universal stable currency to rely on, which is the Euro, to exchange their Liras in order to ensure that their money will not lose its value.
And many Lebanese did so.
Then, on Thursday, February 24, 2022, Russia invaded Ukraine, leading the EURO value to start dropping, creating another panic situation among the Lebanese who had exchanged their Liras and USDs for Euros.
On February 24th, €1 EUR was equal to $1.119. As of today, August 26, 08:00 AM EDT, the EURO rate is €1 = $1.0006, according to Bloomberg.
Why Is The EURO Falling Below Dollar Parity
The general worsening of the Eurozone’s outlook amid soaring gas prices and fears of Russia cutting off natural gas supplies is dragging down the shared currency.
The huge reliance of major economies, such as Germany on Russian gas, has left investors unnerved, with economists forecasting a much quicker recession in the Euro area than in the US.
Fears that Russia may restrict Europe’s supplies of energy have increased the risks of a recession in the Euro area.
Added to that is the difference in interest rate levels in the US and the Eurozone.
The US Federal Reserve has been more aggressive in hiking interest rates in its battle against inflation while the European Central Bank (ECB) has lagged other central banks in raising rates, further weakening the Euro.
What is dollar parity?
Parity basically means that $1 is equal to €1.
The parity level is often a point of resistance at which the Euro investors wrangle to determine which way the currency goes from there.
This was the case when the Euro tumbled toward parity last month. The currency avoided a close below parity after briefly falling to that level.
The Euro dropped behind the Dollar parity last Monday, Aug. 22th with an exchange rate of €1 equaling $0.9945 for the first time in nearly 20 years.
The ECB’s conundrum
Economists said that “the ECB is caught in the worse dilemma a central bank can face: on the one hand inflation is soaring and requires higher interest rates, on the other hand, the Eurozone’s growth is anemic and would benefit from low-interest rates.”
Ultimately, the fall in the Euro is worsening the inflation problem by importing further inflation because of the weak Euro.
As it is in Lebanon, European consumers should expect even higher prices, as well as higher energy and raw materials costs.
Last month, the ECB raised interest rates for the first time in 11 years by a larger-than-expected half-percentage point. It is expected to add another increase next month, but if the economy sinks into recession, that could put the ECB’s series of rate increases on hold.
Who’s Winning And Who’s Losing
USD holders in Europe will find cheaper hotel and restaurant bills and admission tickets.
The weaker Euro could make European export goods more competitive in price in the United States.
In the United States, a stronger dollar means lower prices on imported goods, which will help with inflation.
American companies that do a lot of business in Europe will see the revenue from those businesses shrink when and if they bring those earnings back to the U.S.
A weaker Euro can be a headache for the European Central Bank (ECB) because it can mean higher prices for imported goods, particularly oil, which is priced in dollars.