The euro could soon be doing something it's only done a couple of times in its 16-year existence trading 1-to-1 with the dollar. Europe's single currency has since May been on a downward trajectory against the dollar, mainly because of the divergence in economic performance between the eurozone and the United States. Where the eurozone's recovery from the global financial crisis has been at best anemic, the U.S. economy appears to be going from strength to strength. And that divergence is hurting the euro's fortunes.
From $1.40 last spring, it is now trading below $1.10 for the first time in 12 years and market observers think parity with the dollar could be imminent. On currency exchanges along the Champs-Elysees in Paris, it's not far off, with one euro buying $1.039. "We expect the euro will depreciate below parity in coming months," said Tomas Holinka, economist at Moody's Analytics.
Beyond the symbolic value that two of the world's biggest reserve currencies are worth the same, the euro's decline is helping exporters in the 19 eurozone states and will make it less expensive for U.S. tourists to visit. "The cheap euro makes Greece more attractive, and we have a very positive picture from the U.S.," said Andreas Andreadis, head of the Association of Greek Tourist Enterprises.
The currency movements are mainly driven by the actions of each economy's central banks. While the European Central Bank has slashed interest rates and launched a massive money-creating stimulus, effectively diluting the value of the euro, the U.S. Federal Reserve is doing the opposite it's preparing to raise interest rates following its decision last year to bring an end to its own multi-year stimulus.
Friday's U.S. payrolls figures highlighted that divergence. The forecast-busting 295,000 increase in jobs in February ratcheted up expectations that the Fed would start raising interest rates as soon as June. That prompted a flurry of dollar buying, with the euro sliding 1.6 percent to $1.0858. Since its launch in 1999 at a rate of just shy of $1.18, the euro has spent most of its time above current levels.
