Wall Street Breakfast: Parity In View

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Wall Street Breakfast: Parity In View
Wall Street Breakfast: Parity In View

Things are likely to be more affordable for American tourists visiting Europe this summer, with the exchange rate between the euro and the dollar now about equal.

It’s the first time since 2002 (in the early years of the euro’s existence) that the ratio came close to 1:1, with the currency hitting 1.0005 vs. the greenback early this morning. Many analysts now forecast the euro to hit parity today or in the coming sessions, which may make for some cheap vacations, but could come at a cost of global economic stability.

What’s happening? Looking to tame inflation, the Fed is on track to continue hiking interest rates by 75 bps per meeting, in comparison to the ECB, which is still hesitant to get too aggressive. EU recession fears are more pronounced than they are in the U.S., especially given the grim energy outlook and the shutting of the Nord Stream 1 pipeline for annual maintenance. Similar to the situation in Europe, ultra-dovish policies in Japan are keeping the yen under pressure, leading to a strong wave of constant dollar buying in the forex markets. The yen and the euro are by far the most traded currencies against the dollar, so when both are weak, it makes it harder for anything else to rival the greenback.

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“I really wouldn’t say [the euro at] 0.95 [against the dollar] would be unreasonable,” noted George Saravelos, global head of FX research for Deutsche Bank. “Even if this [Nord Stream] gas returns in terms of full flow after the maintenance period, the [risk] premium is unlikely to go away.” European policymakers have also historically welcomed a weaker currency to stimulate growth by making exports more competitive, but it can exacerbate the inflation issue as it drives up price gains by making imports more expensive.

Outlook: The Bank of Japan wants to ride things out by sticking to its yield curve control policies, hoping that the current levels of inflation aren’t sustainable due to hiccups in the post-COVID recovery. Over in Europe, the ECB is now entertaining the thought of raising rates, but is fearful about what that would mean for peripheral yields in member states like Italy. Meanwhile, Friday’s strong jobs report in the U.S. indicates that the Fed won’t be scared about getting too aggressive, keeping pressure on the euro and yen and sending many investors towards the safe-haven dollar.