You've landed on our UK website.
Click here to visit our USA website.

If you are having difficulty locating the information you require, we're here to help. Just get in touch and we will do our best to assist you.

EUR/USD exchange rate hits parity, but what does this mean for businesses?

business-articlesEUR/USD exchange rate hits parity, but what does this mean for businesses?
Battered by the fallout from the Russia-Ukraine war, the euro has fallen to parity with the US dollar for the first time in almost twenty years.

Amid surging inflation, potential gas rationing and slowing growth, the Eurozone looks like it’s heading for a recession. As a result, currency traders are ditching the single currency.

Instead, they’re flocking to the safe-haven US dollar, which is also benefitting from the huge policy gap between the Federal Reserve and the European Central Bank (ECB).

The EUR/USD exchange rate dipped below $1 in mid-July, down from around $1.137 at the start of 2022.

So, what consequences could this have for the Eurozone economy and beyond?

 

Inflation

The headache of high Eurozone inflation is only set to get worse as EUR/USD weakness drives an further stokes price pressures.

According to the latest data from Eurostat, 48% of imports into the EU are invoiced in US dollars. With EUR/USD at a 20-year low, these dollar-priced imports will cost significantly more in euros, adding to soaring price pressures in the euro area.

In particular, oil and gas are two key resources that are usually priced in USD, and both commodities have surged since Russia’s invasion.

If the EUR/USD exchange rate remains as its current lows, Eurozone inflation could last longer and rise higher than feared.

However, as many commodities are priced in dollars, the relentless rise of the US dollar should start weighing on the commodities market. This could hopefully start to bring down global commodity-related inflation towards the end of the year.

 

Trade

The weakened state of the euro could also have a significant impact on trade between the euro area and its global partners.

Exporters from within the Eurozone could benefit, as their prices become more competitive overseas – particularly in the US. Likewise, companies in other countries that are importing from the euro area will find their supply chains becoming more affordable. These firms can either pocket the profits or keep their prices low and their products more competitive.

Conversely, those within the Eurozone who import from outside the bloc will face reduced purchasing power and higher prices, which they must either absorb or pass on to consumers and risk a fall in sales. Local businesses who do not export could face similarly tough conditions, as imported materials prices rise.

Finally, exporters in the US and elsewhere could see a drop in trade with the Eurozone as their products and services become too expensive.

 

Travel

One potential boon to the Eurozone economy could be an increase in tourism. As travellers from the US will get far more euros for their dollars, they may be enticed by a relatively cheap holiday in Europe. This could be a welcome lifeline for hospitality firms in the euro area, which were hit particularly hard by the pandemic.

Meanwhile, European travel to the States will likely decline. People from within the euro area will find they get less for their euros when they exchange, making overseas trips more costly.

 

Interest rates

Finally, EUR/USD reaching parity makes the ECB’s task even harder.

The European Central Bank has to navigate an economic outlook fraught with peril. Inflation has hit a fresh record high almost every month since January, pressuring the ECB to raise rates. However, recession and fragmentation risks call for caution.

Now, with the single currency’s weakness likely to increase imported inflation, the ECB could be forced to take more hawkish action.

ECB rate hikes are likely to affect the eurozone economy in a number of ways, but the biggest impact could be that they trigger a recession.

A Eurozone recession could also spill over into the UK, as the British economy and financial system are currently highly vulnerable to external shocks.

Needless to say, such events would bring challenges for European businesses on both sides of the Channel, so firms within the UK and the Eurozone should prepare for such an eventuality if possible.

 

Will EUR/USD move lower?

With so many headwinds battering the Eurozone, the single currency could keep falling. EUR/USD may slip as low as $0.95 in the short term, while any major events, such as a recession or the complete cessation of Russian gas exports, could pile even more pressure on the euro.

If you handle euros or US dollars, there are ways that you can protect against negative market movements and capitalise on positive ones. Currencies Direct offers a range of tools that can help you to mitigate risk and maximise profits. Get in touch with us if you’d like to find out more.
 
Currencies Direct

Currencies Direct

Currencies Direct is one of Europe's leading non-bank providers of currency exchange and international payment services. Since we were formed in 1996, we've maintained our focus on providing innovative foreign exchange and international currency transfer services to corporations of all sizes, online sellers and private individuals. We have also expanded our services to provide dynamic and pioneering "business to business" solutions to help companies, tier 2/3 banks and other non-bank financial institutions to process their international payments. Our headquarters are in the City of London (United Kingdom) and we have operations in continental Europe, Africa, Asia, and the United States. Currencies Direct is jointly owned by private equity firms Palamon Capital Partners and Corsair Capital.

Check our exchange rate

Thanks, we'll be in touch.

Check your inbox - one of our currency experts will be in touch to complete your quote.

If you want see our online exchange rates straight away, simply register online & log in.