WASHINGTON — The U.S. dollar is nearly equal to the euro for the first time in 20 years, complicating an already uncertain outlook for the United States, the world’s biggest economy.
One of the European currency was worth 1.00005 dollars Tuesday. For an average $100 purchase, that doesn't make much difference. But for global finance and banking, that 0.00005 still keeps the euro slightly ahead of the dollar.
The last time the euro was below the dollar was on July 15, 2002 — nearly 20 years ago to the day — when huge U.S. trade deficits and accounting scandals on Wall Street pulled down the U.S. currency. The last time the two currencies were this close was in December of that year.
The trend is likely to hurt American companies because their goods will be more expensive in foreign markets, meaning fewer sales. Fewer exports could hurt the already vulnerable U.S. economy, which is in a dangerous position because of high employment and inflation.
Economists say the risk of recession is already rising in the United States as the Fed raises borrowing costs and consumers deplete the savings they built up during the pandemic.
“The strength of the dollar,’’ said Eswar Prasad, an economist at Cornell University and the Brookings Institution, “will certainly do no favors for U.S. exporters.’’
Yet there's a positive side for Americans, too: A stronger buck provides modest relief from runaway inflation because the vast array of goods that are imported to the U.S. — from cars and computers to toys and medical equipment — become less expensive.
A strengthened dollar also delivers bargains to American tourists sightseeing in Europe, from Amsterdam to Athens.
The dollar is climbing mainly because the Federal Reserve is raising interest rates more aggressively than central banks in other countries are in its effort to cool the hottest U.S. inflation in four decades. The Fed's rate hikes cause yields on U.S. Treasurys to rise, which attracts investors seeking richer yields than they can get elsewhere in the world. This increased demand for dollar-denominated securities, in turn, boosts the dollar's value.
Also contributing to the currency's appeal, notes Rubeela Farooqi of High Frequency Economics, is that despite concern about a potential recession in the United States, “the U.S. economy is on firmer footing compared to Europe.’’
This year, the euro has sagged largely because of growing fears that the 19 countries that use the currency will sink into recession. The war in Ukraine has magnified oil and gas prices and punished European consumers and businesses.
In particular, Russia’s recent reduction in natural gas supplies has sent prices skyrocketing and raised fears of a total cutoff that could force governments to ration energy to industry to spare homes, schools and hospitals. European leaders have denounced Moscow's move as an effort to blackmail Europe for backing Ukraine and embracing Western sanctions in the aftermath of Russia's invasion.