Due to the euro’s recent drop in value, the U.S. dollar is reaching near parity with the currency. This marks the first time the U.S. dollar and the euro have been equal value in 20 years. Why does the euro keep falling?
This slide is likely a consequence of the recent energy crisis taking root in the continent. This week, Europe was put in a frenzy when Russia’s Nord Stream 1 pipeline temporarily shut down for maintenance. Now, fears are swirling that Russia will opt to not resume operation of the pipeline. The country would do so as a sort a backlash for sanctions as well as weapons supplied to Ukraine. The pipeline provides more than half of Germany’s natural gas.
To be clear, the Nord Stream 1 can be viewed as the (very heavy) feather that broke the camel’s back. A currency’s worth is a reflection of its domestic economic potential; Europe’s economic health has long been a point of concern. While the U.S. has certainly seen the repercussion of Russia’s war on Ukraine, Europe itself is far more dependent on Russian and Ukrainian trade.
In Europe, rising energy costs sent inflation to 8.6% in June, the highest level recorded since 1997. Much of the continent is swirling over a potential recession in the face of debilitating supply shortages. Add in tightening monetary policy and harsher sanctions against Russia and the euro’s decline makes more sense.
Why Does the Euro Keep Falling? What Does It Mean for Investors?
A weaker euro by definition implies a stronger dollar. So, U.S. consumers immediately benefit from the change in exchange rate as everything from Europe is suddenly, effectively cheaper. Wine and cheese from France, Italian and German cars and other imported goods are now less expensive in U.S. dollars.
Of course, this heavily benefits businesses that import European goods as a part of their business plans, like transportation companies. Likewise, U.S. tourists in Europe will find that most domestic services and products are virtually discounted.
On the flip side, Europeans will end up paying the difference in the exchange rate. Everything imported into the continent is functionally more expensive.
For investors, a weaker euro means a sale on investments into European companies. Many European companies are traded on either the New York Stock Exchange or Nasdaq, or sold as American Depository Receipts (ADRs). ADRs are a functionally streamlined way for Americans to invest in international companies not-yet-listed in the states. As the euro weakens in relation to the dollar, European ADRs are becoming cheaper. Their share prices are less than they should be, were the euro still strong, upon conversion to USD.
It’s unclear how Europe will escape its current energy shortage. Regardless, investors will be closely watching the euro going forward as a sign of things to come.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
