Sunday, September 25

The euro is already worth the same as the dollar. And that has huge implications for the price of the technology.

A year ago with one euro you could buy 1.20 dollars. And that was the figure in which it used to move, at least since 2018. In 2015 it was around $1.10 and before that it was close to $1.40. But the truth is that this week the euro and the dollar have reached parity, something that has not been seen for twenty years. This parity has several explanations and also consequences for Europeans.

And above all for consumers of products that are normally bought in dollars, such as energy or electronics. We are already seeing movements in that direction.

Why is there parity?. There are two reasons why the dollar is so strong right now. The first is the sense of crisis that is perceived in Europe: the war in Ukraine generates uncertainty in its vicinity and investors seek refuge. Contrary to what happened in the 2008 crisis, which sharply devalued the dollar, this time the money is fleeing to the other side of the Atlantic.

more reasons. However, it is not the only reason. Inflation is still high and the Central Banks of the world are reacting strongly. Except the European Central Bank. The US Federal Reserve (Fed) has already raised interest rates three times in 2022: the first in March, of 25 basis points; the second in May, of 50 basic points; and the third in June, by 75 basis points, being the strongest rise since 1994.

Analysts expect rates in the US to be in the range of 3.25% to 3.75% by the end of the year, a spectacular rise in a year when they started at 0%. But it is the strategy that the Fed has contemplated to combat inflation.

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The ECB has decided to raise rates a decade later.  This is how the economy will change from top to bottom

And in Europe? In the Euro zone we have not yet seen any rate hike, despite the fact that the inflation data is also bad. Of course, it is expected that this July the rates will rise by 25 basis points. The reasons for this differentiated policy of the ECB are several: it seems that inflation in Europe is almost all imported; the relaxations of the monetary measures were having an effect on the risk premiums of the southern countries; and really the ECB had been looking for some inflation for some time to reduce the most indebted economies in real terms.

This difference in strategies makes the dollar more interesting for investors than the euro, since they can obtain more returns in relatively safe investments such as government bonds.

Consequences for consumers. The fact that the dollar is at parity with the euro makes US imports more expensive, simple as that. Where a year ago with 100 euros you could buy products worth 120 dollars, now they can only buy products worth 100 dollars. And this makes manufacturers selling in Europe raise their price lists in euros, to make up the difference.

It is not something theoretical, we have already seen how Apple raised its prices in May and it will surely do so with more force in the next revision. And not only Apple but all the manufacturers that work with the dollar as their main currency.

From United States. Yes, most of the products are manufactured in China and it may seem logical to look more at this currency than at the dollar, but two things must be taken into account: first, the Yuan moves quite a bit with the dollar and the appreciation of the American currency has been accompanied by an appreciation of China; second, the cost of a product is not determined only by its manufacture but by the R&D that is normally carried out in the US.

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Think of electronic products: they will have components from Qualcomm, Intel, NVIDA and many other American companies, even if they are made in Asia. The prices of electronics, therefore, are going to rise in their denomination in euros.

Also the energy. Another range of products that will become more expensive due to this parity will be fuel, since international negotiations are carried out in dollars. There may be other effects here, as weaker demand from Europe due to higher prices could offset the currency effect, but the truth is that energy demand is quite inelastic, at least in the short term.

So does this parity have any advantage? Yes. Just as American products are going to be more expensive here, European products are going to be cheaper in the rest of the world. And that makes us more competitive. As long as energy prices allow us to be competitive, of course.

Image: Markus Spikse

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