Euro Fall: Why Parity Between the Euro and US Dollar May Persist
Franklin Mutual Series’ Investment Strategist Katrina Dudley believes that higher inflation in Europe stemming from rising energy prices, as well as lower relative interest rates, may keep the euro under pressure.
The euro has reached parity with the US dollar. The war in Ukraine, a resulting spike in energy prices and a central bank that has been slower than the US Federal Reserve (Fed) to hike interest rates to tame inflation has sent the euro tumbling against the US dollar over the first eight months of 2022. A fast recovery for the currency may be some ways off, but the euro’s depreciation could create near-term opportunities for value stock investors.
While the euro was declining gradually against the US dollar at the start of the year, Russia’s invasion of Ukraine sparked a more aggressive selloff. The potential for a sharp pickup in inflationary pressures and the region’s lack of energy and defense security were largely to blame.
In the wake of the invasion, energy prices across the region surged amid fears of natural gas export disruptions from Russia that have come to fruition. We have seen the Russians recently shut down the important Nord Stream pipeline, first for maintenance and now until sanctions are lifted. The move comes at a time when countries like Germany are filling their natural gas reserves to ensure they have enough gas to get through the winter.
Over time, we expect Germany and other European countries that have depended on Russian gas to transition to other energy sources, such as renewables and liquified natural gas (LNG). But over the near term, we could see ongoing supply challenges and continuing high energy prices.