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Why a Euro is now worth less than a dollar

The European Parliament building in Brussels. Credit: Mark Renders / Getty

July 25, 2022 - 7:30am

Last week the euro slipped below parity with the US dollar for the first time in history. This marks a grim milestone, not only in economic terms but also for the long-term geopolitical relationship between the United States and Europe.

There are several reasons for the euro’s fall. The purely financial reasons are twofold. The ECB has been slower to raise interest rates than the Federal Reserve, which incentivises investors to switch capital from Europe to the United States to take advantage of the higher interest rates. The other purely financial reason for the decline is that markets are rocky. When there is turbulence in financial markets investors pile into dollar-denominated bonds — this is known as ‘flight to safety’.

Yet this is not the first time in history the Federal Reserve has had higher interest rates than the ECB. Nor is it the first time that panicked investors have piled into dollar bonds. Never before have these trends pushed the euro below parity. To understand this truly historic event we must consider the war in Ukraine and the accompanying energy crisis.

The sanctions that the United States and Europe have imposed on Russia have been met with a predictable response from Russia who appear to be choking off European gas supplies. No one is clear on how bad this is going to get because the Russians are being tactically vague about what they are going to do. In the worst-case scenario, the Russians would turn off the gas completely. In the more likely scenario they will only send a minimal amount of gas.

A gas shortage this winter would mean that European production would be subject to rolling blackouts. This, combined with much higher energy prices amid shortages, means higher inflation in Europe. For this reason, the markets are pushing the euro down relative to the dollar: they are pricing in the coming shortages and inflation.

There are major geopolitical implications. European leaders have already woken up to the fact that the sanctions against Russia have backfired, but they do not talk about it too loudly in public. They followed the United States’ lead on these sanctions, trusting that the Americans had a plan. Now they are waking up to the fact that the sanctions not harming the Russians very much, but they risk destroying the European economy.

In a sense then, you could read the falling euro as a spreading loss of faith in American leadership. There are already rumblings in the European capitals about the credibility of the American-led strategy on Ukraine. Every now and again, a leader will let what is being talked about behind the scenes slip in a public speech. A few days ago, for example, Germany’s Foreign Minister Annalena Baerbock said that she feared “popular uprisings” due to gas shortages. Alarmingly, this is what European leaders are talking about in private.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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Peter B
Peter B
2 years ago

I suggest that a weakening Euro is really “a spreading loss of faith in EU leadership” and not “a spreading loss of faith in American leadership“.
But go on – blame someone else for your home-grown problems and incompetence.
“European leaders”. Now there’s a non-sequitur.
The problems with the European economy pre-date the Ukraine crisis and would not go away if sanctions on Russia were removed. This is just fantasy. As is believing that sanctions will not have some economic cost. As is believing they are having no effect on Russia.
Finally, the reason the Euro is falling is that the European economy is so weak that EU interest rates cannot be raised (even though they should be). The ECB is still buying bonds (QE). Christine Lagarde is on record as saying that the ECB balance sheet “will be reduced” – but is quite unable to say how this will be achieved – she has no plan. Almost forgot – she’s the one with the criminal record for corruption who never served any time and got appointed to run the ECB *after her conviction”.
But let’s blame the Yanks.
Is there anything in this article that is correct ?

Steve Murray
Steve Murray
2 years ago
Reply to  Peter B

Yes – the simple fact that the euro has slipped below the dollar.
Thanks heavens we in the UK are free (or are becoming freed) from our ties with the EU and their sclerotic systems. Whilst the EU continues to try to exact revenge upon us for our temerity, every month that passes demonstrates that this was the single most important democratic decision ever taken by the population of these islands. Of course, the howl-round of the MSM still thinks otherwise and delights in concentrating on queues at cross-channel pinch points. There’s a very simple solution – stop going on holiday to France, at least until they come to their senses and the French economy suffers as a result. Other destinations are available!

Last edited 2 years ago by Steve Murray
Terry Davies
Terry Davies
2 years ago
Reply to  Steve Murray

Overnight sailing Hull to Zeebrugge. On hols as soon as you step onboard! Or Southampton to Santander…

Kathleen Stern
Kathleen Stern
2 years ago
Reply to  Steve Murray

I’ll soon be taking my third trip to Greece and then to Florida with my family in November escaping some of the high energy costs inflicted on us all by loony eco policies and general incompetence by politicians and their lockdowns and tax money thrown away.

Cathy Carron
Cathy Carron
2 years ago
Reply to  Peter B

Last week the euro slipped below parity with the US dollar for the first time in history. “
WRONG – the euro slipped below parity last in 2002

Warren T
Warren T
2 years ago
Reply to  Cathy Carron

That’s what I thought too! I hadn’t yet verified it until you did. Thank you.

Peter B
Peter B
2 years ago
Reply to  Cathy Carron

Very good point. But I never said that. You’re correcting the article and not my comment !

Jason Highley
Jason Highley
2 years ago
Reply to  Peter B

Absolutely – this is bonkers “analysis”, written by someone monitoring purely political trends. There are NUMEROUS monetary and financial reasons why this is happening. It’s all the chickens of a fiscal union without political union coming home to roost. Sure, the ECB will try to invent enforcement mechanisms, but the damage is baked in from the EU’s founding. It’s the “Doom Loop”, as Grant Williams referred to it in his latest newsletter. No Transmission Protection Instrument is going to save this. It’s amazing – watching a financial suicide pact unfold before your very eyes. They must be absolutely begging Russia to stop interfering with their precious plans to save “the World.”

Last edited 2 years ago by Jason Highley
Jason Spalding
Jason Spalding
2 years ago
Reply to  Jason Highley

Your comments related watching a financial suicide pact was spot on.

Last edited 2 years ago by Jason Spalding
Peter Johnson
Peter Johnson
2 years ago
Reply to  Peter B

I don’t know why Europe would expect anyone else to deal with Russia. This is a European problem that should have a home grown solution.

Jeremy Bray
Jeremy Bray
2 years ago

Interesting that Victor Orban seems to have had a better handle on the issue of oil sanctions than the self regarding elite of the EU. Of course, something needed to be done to try to cripple the aggressive Russian regime but the chosen weapon seems to have severe drawbacks for the EU’s economy. German green policy seems to have left their economy at particular risk.

Fraser Bailey
Fraser Bailey
2 years ago
Reply to  Jeremy Bray

I don’t think it’s particularly ‘interesting’ that Organ has a better handle on events than Brussels. He is far more intelligent than they are and puts the interests of his people at the centre of his policies.

Warren T
Warren T
2 years ago
Reply to  Fraser Bailey

Well, we in the U.S. know what happens to presidents who put the interests of his people at the center of his politics!

Cathy Carron
Cathy Carron
2 years ago
Reply to  Jeremy Bray

Trump was right re: Germany and its dependence on Russia…’wonder what Angela is up to at this point ? Vacationing @ Putin’s dacha?

Ian Stewart
Ian Stewart
2 years ago
Reply to  Jeremy Bray

But the extremely useful outcome of the sanctions is that energy dependency and strategy is being urgently addressed, at the expense of green policies that punish the poorest.

Putin’s stupid war will destroy Russia and in the long term might save Europe. This article rather dimly considers just the short term.

Perry de Havilland
Perry de Havilland
2 years ago

Absurd article. Of course the sanctions are hurting Russia, particularly the aerospace sector. For example, nothing other than the frame of an Orlan drone is actually made in Russia.

Nick R L
Nick R L
2 years ago

The US will benefit hugely from the energy they will now sell the EU at inflated prices rather than the reasonably priced Russian gas.

Fraser Bailey
Fraser Bailey
2 years ago
Reply to  Nick R L

Yes, that’s why the US was always opposed to Nord Stream II. I was looking forward to the Americans bombing it, but I guess that won’t be necessary now.

Nicky Samengo-Turner
Nicky Samengo-Turner
2 years ago

Lesson 1 in kindergarten bond market economics… The Euro will not and cannot work under the false and flawed premise that an EU Govt issued bond is ” the same currency” when the bonds in this ” same currency” trade at completely different spreads/ prices/ coupons as ” each other”!!!!

Dermot O'Sullivan
Dermot O'Sullivan
2 years ago

Starting an article with a falsehood isn’t a good idea:

‘The single currency has been worth more than the dollar for most of its history. It lagged below the dollar in the years following the currency’s launch in 1999, but the last time it traded below the dollar was December 2002…’

Maks Chernenko
Maks Chernenko
1 year ago

I agree with Peter B. The author expresses huge incompetence in political affairs. Europe has failed its eastern politics much priorly to Russia attack on Ukraine, starting with Shreder continuing with Olland and Merkel who played games with maniac Putin, and put EU into the gas trap. And, in addition, sanctions are hugely harming russian economy. The only one thing I agree with the author is that sanctions should be risen up even more, and EU need stop buying bloody oil and gas from bloody putin.

Cheers to the author!
Please, dont forget to add up next time in the end of the article that you have been paid for this article by russians.

M. M.
M. M.
2 years ago

Philip Pilkington wrote, “In a sense then, you could read the falling euro as a spreading loss of faith in American leadership. There are already rumblings in the European capitals about the credibility of the American-led strategy on Ukraine.”

The United States is undergoing rapid demographic change (due to its open borders). By 2040, Western culture will decline to the status of a minority culture, and this country will cease being a Western nation. Hispanic culture will become the dominant culture. (In California, Western culture is already rejected by most residents, and Hispanic culture dominates.)

As we approach 2040, the quality of American leadership will steadily decline until it reaches the level of a typical Hispanic nation in Latin America. The quality of American organizations will also decline. An example of such an organization is the Centers of Disease Control and Prevention: the American response to the pandemic was much worse than the Japanese response, for example.

European governments must begin distancing themselves from Washington. European militaries and intelligence agencies must begin distancing themselves from the American military (and its proxy known as NATO) and the American intelligence community.

The Germans are in the best position to be the leader of the West. They should lead the West henceforth.

Get more info about this issue.

Andrew D
Andrew D
2 years ago
Reply to  M. M.

In what way is Hispanic culture less European than WASP culture?

Fraser Bailey
Fraser Bailey
2 years ago
Reply to  Andrew D

Good point. And the fact is that many of the Hispanic politicians now emerging on the Republican side seem to be far more useful than the vast majority of WASP Republicans, many of whom are worthless RINOS.

Linda Hutchinson
Linda Hutchinson
2 years ago
Reply to  Andrew D

This point has been made many times to M.M., but, much as I hate to use such terms, (s)he appears to be an “Hispanophobe” (I may heve just made up that word), at least that is how (s)he comes across on this site.

Peter Johnson
Peter Johnson
2 years ago
Reply to  Andrew D

Focus on family, religion – and since they chose to immigrate to the US – hard work. Sounds pretty good to me.

Fraser Bailey
Fraser Bailey
2 years ago
Reply to  M. M.

You may be correct about the US, but I prefer Hispanic culture to the Islamic culture that will come to dominate Europe over the next few decades. And if you think Germany – governed as it is by an incompetency of greens and other loons – is capable of leading the West, you are mad.

Peter B
Peter B
2 years ago
Reply to  Fraser Bailey

We already know MM is barking mad. Adrift in Dunning-Krugerland.

Doug Pingel
Doug Pingel
2 years ago
Reply to  M. M.

AH yes – German leadership of Europe. They tried that twice in the last century and it didn’t work out. Now there seems to be a definite move towards ingratiating themselves with the present enemy – no leadershp at all. How many German ex-politicians seem to be on a Russian government pension scheme?