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In terms of Exchange rate, one Euro became equal to one US dollar.
The weakening Euro against the dollar shows that investors are pulling out money from the Eurozone and into the US.
Why is the Euro losing against the dollar?
- The Euro has been weakening against the dollar since the start of 2008.
- 2021, the decline has been sharp.
- Euro’s continued weakness against the dollar can be broken into two parts .
- Weakness of Eurozone’s Economy
- Covid 19 pandemic and the fiscal response to counter it had left the eurozone with a weak economy facing historically high inflation.
- Russia’s war on Ukraine and the consequent ban on Russian energy have left the European economies completely vulnerable.
- For instance, Germany, the biggest Eurozone economy, in May registered its first trade deficit since 1991.
- It makes more companies shift base to the US, which is far more independent in energy terms.
- Monetary policy response between the US and European Central banks(ECB)
- Response of the US Fed, which has made it clear that it will not stop until inflation, which is also at multi-decade highs in the US, comes back to the target rate of 2%.
- The US Fed is aggressively raising interest rates, even if that brings in a recession.
- The ECB, by contrast, hasn’t moved.
- This has created another big reason for the money to flow out to the US because it offers better returns for investments.
- Weakness of Eurozone’s Economy
Why is the dollar appreciating?
- The dollar remains the safest bet for global investors and news outside the US economy is worse than it is in the US.
- The weakness in the euro against the dollar should also be seen as part of the larger story where the US dollar is gaining against all currencies of the world.
Will the rupee fall against the Euro?
- Indian rupee, despite its continued weakness, has shown more resilience against the dollar than most other currencies
- A case in points is the fact that the rupee has sharply appreciated against the euro since the start of 2022
- It was close to 90 at the start and is now close to 80 to a euro
How will the Euro’s fall affect the Indian rupee?
- At the moment, the rupee has appreciated considerably
- However, if the euro continues to stay weak and trend below parity, it will also take the rupee down with it.
- In other words, if the euro continues to weaken, the rupee, which is already just a little away from 80 to a dollar, will further weaken against the dollar
- This is because the euro has immense trade linkages with India and similar emerging economies
Content Source: Indian Express