Europe was born on January 1, 1999, 1:1.183 against the US dollar.
However, after only one week of glory, it entered a three-year journey of depreciation.
In November of that year, Euro fell below the important psychological price mark of US dollar parity for the first time, and fell to a low in 2001, with a depreciation of nearly 30%.
It was not until 2002 that the euro became the only legal currency in 12 countries that it had fully formally circulated and began to enter the appreciation channel.
html After 2020, the euro fell below the US dollar parity again.From the reason, there are many shadows from 20 years ago.
From the outlook, falling below parity may just be the beginning.
falls below the US dollar parity "déjà vu"
World War II , Europe began to reflect on the historical lessons of fighting alone and realized that only by uniting politically and economically can we achieve a situation of confrontation with economic powers such as the United States and Japan.
European politicians led by French President Charles de Gaulle proposed the strategic idea of starting from industrial cooperation, engaging in common development in trade, tariffs, currency, etc., and finally transitioning to political alliances. In the era of post-Breton system, European countries adopted a snake-shaped floating mechanism, that is, the increase and depreciation range of each currency against another currency shall not exceed 2.5%, and began to establish an external floating and fixed exchange rate system.
In May 1998, the European Monetary Bureau, EU members and member states Central Banks decided to use the market price of currencies of various countries in the euro zone (ECU European currency units) in the foreign exchange market on December 31, 1998 as the basis for the fixed exchange rate in the euro zone, and finally discounted 1:10 to euros (EUR).
The euro was born on January 1, 1999, 1:1.183 against the US dollar, and once rose to 1.19.
However, after only one week of glory, the euro entered a three-year journey of depreciation.
At the end of November of the same year, the euro fell below the US dollar parity, an important psychological price for investors. After two months of fluctuations around the US dollar parity, it fell all the way after falling below the US dollar parity again in February 2000. It fell to a low point in 2001, with a depreciation of nearly 30% between the euro and the US$0.85.
There are several reasons why the euro fell below the US dollar parity that year: fundamentals differences, monetary policy , risk aversion sentiment and geopolitics .
In 1985, after the five countries of the United States, Germany, France, Britain and Japan signed the " Square Agreement ", the German Mark, Japanese yen and others appreciated significantly against the US dollar. After the continued easing in the early stage, US inflation rose, and in 1986, the US monetary policy gradually tightened. Although Europe is not as bubble burst and falls into depression like Japan, Europe's exports have also been hit hard.
In the mid-to-late 1990s, driven by the joint promotion of globalization, financial liberalization, and the IT revolution, the US economic growth took the lead, and the US dollar index soared sharply. By 1999, the U.S. economy had a growth rate of 4.8%, and the European economy had a growth of 2.9%.
At the same time, the structural problems of unbalanced economic development of euro zone began to be exposed. The country's economic differences range from 1.5% to 7.8%, while countries such as Ireland , Luxembourg grew by 7-9%, but Germany, France, Belgium was only 1.5-3%.
Such a huge fundamental difference makes it extremely difficult to coordinate monetary policy, and the ECB focuses its target on price stability and tends to let the market decide the exchange rate level. Due to the blow to exports caused by the appreciation after the Plaza Agreement, countries in the euro zone even hope to use the euro to stimulate exports and drive economic recovery in the region.
. With the appreciation of the US interest rate hike, the Asian financial crisis and the Russian debt crisis broke out after the overprosperity. Risk aversion sentiment drove capital to further return to the United States. From July 1997 to May 2001, the US dollar index appreciated by 24.4% on the basis of the 16.8% increase in value. The euro also fell to the bottom during the same period.
Of course, geopolitical conflicts are not absent. At the end of 1998, the outbreak of of the Kosovo crisis made European political situation unstable and investors began to withdraw from the European financial market. However, the US military-industrial company benefited from this, and the stock surge led to the Dow Jones Index breaking through the 10,000 points mark.
and even then, the Internet bubble burst in 2000, and the "911" in 2001 caused the US economy to take a sharp turn for the worse. Federal Reserve's continuous interest rate cuts failed to effectively reverse the weak euro.
It was not until the US economy bottomed out in early 2002 and the euro became the only legal currency in 12 countries that it finally broke through the parity of the US dollar and entered a cycle of appreciation.
Euro injured in the Russian-Ukrainian conflict
On July 12 and 13, 2022, the euro against the US dollar fell below 1:1 between trading for two consecutive days. This is 20 years later, the euro's exchange rate is approaching US dollar parity again. This year, the euro exchange rate fell by 11.5%, driving the ICE US dollar index to appreciate by 7.1 percentage points, contributing 56.4% to the increase in the US dollar during the same period.
The COVID-19 pandemic has hit Europe as hard as the United States, but the recovery in Europe is even worse. is because its economic growth has slowed before the coronavirus, while more rigid policies and higher taxes have reduced the resilience of Europe's recovery.
The difference in economic recovery is reflected in the monetary policy level. Faced with the highest inflation in 40 years, the Federal Reserve is accelerating the process of policy normalization to reach neutral interest rates as soon as possible. The short-term target interest rate has been raised by 1.5 percentage points to 1.5%-1.75%, and is expected to be raised by another 0.75 or even 1 percentage point this month. At the same time, the Federal Reserve has turned on to reduce the balance sheet , shrinking the liquidity level between the financial systems. But the ECB is less motivated to fight inflation. It stopped buying net assets last month and said it would not start to shrink its balance sheet until 2024. The short-term policy interest rate is still negative 0.5%, and a 25 basis point rate hike is expected this month. Of course, ECB officials hinted that the second interest rate hike in September will achieve zero nominal interest rate .
. As the spread between government bond yields in some countries and German government bond yields expands, the ECB is also busy designing a mechanism to avoid "fragmentation", which means that if implemented, the actual effect will be to continue to suppress interest rates, especially for Italy. This growing rate of return gap between the United States and the euro zone is the real reason why the euro is approaching US dollar parity again.
However, most of the euro's decline this year was caused by the outbreak of the Russian-Ukrainian conflict at the end of February. The conflict, which still spreads, has had an unpredictable impact on the fragile economy of the euro zone, exacerbating geopolitical uncertainty in Europe, pushing up energy prices to intensify inflation and will curb future economic growth across the euro zone. On Monday, the Nord Stream 1 natural gas pipeline was closed. Once the energy crisis occurs in the fourth quarter, Europe will not only consume, but also face difficulties in production.
And the traditional view that the weak euro promotes European exports has also been falsified. With Germany last month reporting a monthly trade deficit since 1991, Europe's dependence on manufacturing exports are facing painful torture. Energy imports are the main reason, and the weak euro is increasing the import costs of German manufacturers in euros.
Euro's future is bleak
As the current US dollar index climbs strongly to its high level since 2002, the euro, which has been highly anticipated to challenge the dominance of the US dollar's global monetary system since its birth, has become even more bleak.
After the official circulation in 2002, the euro quickly developed into the world's second largest currency, and even surpassed the US dollar in some fields. The euro's international status once subverted.
But The outbreak of reversed the appreciation trend of the euro against the US dollar. The continued economic downturn in the region, prominent institutional defects and increased political uncertainty have made the euro's international status worse and worse.
In the international payment field, the euro's share once exceeded the US dollar by more than 40%, making it the world's largest payment currency. However, after the European debt crisis, the euro's share of global payments continued to decline, surpassed by the US dollar in 2013, losing the world's largest payment currency low. In March this year, the euro's share of the global payment market fell to 35.4%, the lowest proportion in the first few months of the new crown epidemic. Later, due to the payment sanctions imposed by Europe and the United States on Russia, many countries had to choose euro transactions and rebounded.
In the global foreign exchange trading market , the euro has been the second active currency in the global foreign exchange market since its birth. The euro's share of global forex trading peaked at 39% in 2010. According to the three-year foreign exchange survey report released by Bank for International Settlements (BIS), the US dollar still maintains its global currency dominance by 2020, accounting for 88% of all transaction currencies; the euro's trading share has fallen to 32% in the past decade.
In the field of reserve currency, the proportion of euro is constantly decreasing. The IMF report shows that the US dollar accounted for 58.88% of the global foreign exchange reserves by the first quarter of this year, and is still the world's largest reserve currency. The decline has been about 6.5 percentage points in the past five years. The euro fell from its peak of 28% in 2010 to 20.05%.
In the global bond market, the euro's advantage continues to weaken. Data from the Bank for International Settlements (BIS) shows that as of the end of the first half of 2021, the proportion of US dollar bonds in global bonds was 41%. Euro bonds account for 19%, down nearly 7 percentage points from the peak in 2008 and 2009.
After the European debt crisis, the eurozone economy has never recovered. 20 years after the birth of the euro, EU leaders have repeatedly expressed their desire to enhance the euro's international status. However, the arrival of the new crown epidemic, especially the spread of the Russian-Ukrainian conflict, has pushed the eurozone, which has already weak economic growth, internalization, difficult policy adjustment, and even the warming of Brexit sentiment to the brink of crisis.
Whether the US dollar is strong, expected to rise in future recession, is still to be discussed. Will the decline in the US economy and the marginal shift in the Federal Reserve's monetary policy push the US dollar index to peak and fall?
Don’t forget that once there is a problem with the US economy, it will be more difficult for global economy to survive alone. The risk and degree of recession are greater than that of the United States, and the market’s risk aversion will be higher. This is the case with the euro in 2002. During the entire recession and even interest rate cuts, the US dollar is still stronger.
20 years ago, the euro was lingering under US dollar parity for 30 months. Its turnaround is to replace the full and formal circulation of the only legal currency in 12 countries, and Europe further moves towards unification and integration.
But what about 20 years later? Should we expect Russia to resume cheap natural gas supply, or do we expect the Federal Reserve to turn dovishly beyond expectations?
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