In good news for anybody planning a European vacation but bad news for American exporters, the euro has sunk to its lowest level in almost 20 years. The exchange rate is now hovering around $1 to 1 euro. The rate, last seen in December 2002, follows a rapid decline for the European currency amid surging inflation and the war in Ukraine, which has hit European Union economies harder than the US, the New York Times reports. The euro has sagged more than 11% so far this year while the dollar has remained very resilient against other currencies.
The euro, now the currency of 19 European countries—with a 20th, Croatia, set to join next year—peaked at $1.60 to the euro in 2008. Analysts say that the fall to $1 is another sign that the eurozone is heading into a recession. Lucio Sarno, professor of finance at the University of Cambridge, tells Al Jazeera that higher interest rates in the US have helped keep the dollar strong. The rising rates "attract further investment in dollar assets, and this is in addition to the strong demand for dollar driven by its safe haven status at times of war," Sarno says.
Sarno says the European Central Bank is now facing one of the worst dilemmas a central bank can face, with soaring inflation requiring a hike in interest rates at a time when the sagging economy would benefit from lower interest rates. And in more bad news for European economies, the fall in the euro's value will make imported goods more expensive, increasing inflation even more. For Americans, the fall may feel "like no big deal unless you're a currency trader," a Wall Street Journal editorial says. "But sharp movements in exchange rates create uncertainty and can lead to economic and financial instability." (More euro stories.)
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