The dollar continued to strengthen against other currencies early Tuesday, reaching parity with the euro for the first time in two decades and hitting its strongest point against the British pound in more than two years.
The euro fell to the equivalent of $1 as part of a months-long slide that has seen the currency decline 12% since the start of 2022, CNN reported. The European Union faces several economic headwinds, including fears of a recession, high inflation and uncertainty over its energy supply due to the Russia-Ukraine war.
If all that sounds familiar, you’re right: The United States faces many of the same problems. The reason the dollar has strengthened is because the Federal Reserve has moved aggressively to hike interest rates and tighten monetary policy as a way of battling inflation. Those moves have made the greenback a safe haven for many investors, analysts say.
The European Central Bank has similar plans to raise interest rates to ease eurozone inflation that is running at 8.6%, but it has waited much longer to make a move. The ECB announced that it will hike interest rates this month for the first time since 2011, CNN noted. But some economists fear the ECB acted too late to avert a sharp economic downturn, and that the euro will keep slipping in value.
Deutsche Bank analyst George Saravelos noted in a report last week that the euro could sink as low as $0.95 to $0.97 “if both Europe and the U.S. find themselves slip-sliding into a recession in Q3 while the Fed is still hiking rates.”
Meanwhile, the pound weakened against the dollar to $1.185 Tuesday morning, the Guardian reported — its lowest point since March 2020. The pound has been weighed down by political uncertainty tied to the recent resignation of former Prime Minister Boris Johnson as well as a darkening economic picture.
“The pressure on the euro and sterling reflects grave concern about the economic outlook.” Neil Wilson, chief market analyst at Markets.com, told the Guardian. “With inflation soaring and no plan to get it under control, the currencies are sitting ducks.”
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