Euro-dollar parity: the winners, the losers


Two key countries in the zone, France and Italy, seem to have made little progress in their budgetary management since the sovereign debt crisis a little over ten years ago, unlike countries such as Spain, Portugal or Greece, which have spectacularly cleaned up their public finances. Add to that the ECB which is slow to repeal its ultra-accommodative monetary policy, while the FED seems, for its part, determined in its inflection, and the traditional position “flight-to-safety*” adopted by investors, who prefer to rush to the US dollar when the international context deteriorates… and you get a spectacular fall in the euro against the dollar. The two currencies are therefore now trading at parity, whereas on the long cycle, the natural balance was around 1.2/1.3USD for 1EUR.

The fear of the worst

The ECB is in fact in an impossible situation. If it raises its key rates, it places several European states in an impossible budgetary situation, including France, in the first place, since the state budget remains incurably in deficit and would bear only very badly an increase in the interest charge. .

If the European Central Bank maintains an accommodating policy, as it has chosen to do for the moment, despite the announcement of a forthcoming timid inflection, it is encouraging inflation and putting unbearable pressure on citizens in a fragile political context.

That being said, the rise in the dollar penalizes certain emerging countries more than those in the euro zone. It increases the cost of imported food and energy. As the euro zone is largely self-sufficient in food, the main problem lies in energy. On the other hand, many emerging countries have to import their foodstuffs just as much as energy, which they pay for in dollars. In some of these countries, uncontrolled inflation is already creating food riots.

Furthermore, several of these emerging countries with structurally weak currencies borrow on the international markets in USD to finance their development… In addition to the cost of imports, the rise in the USD therefore dramatically increases the cost of their interest charges. Even when this does not place them in a situation of insolvency, this phenomenon limits their access to international financing, and has direct consequences on their investment programs and their economic growth.

This, in turn, has an impact on the global economy by depressing demand from emerging countries – here too the rise in the USD has an unfavorable effect on euro zone countries. In short, we are witnessing an almost perfect remake of the crisis in the Asian countries in 1997, even if we can reasonably bet here that this will not have escaped the notice of the IMF, which will therefore take the appropriate measures to avoid contagion or less cushion the shock.

A strong dollar rather than a weak euro

If we look at the situation in detail, it is not so much the euro which is weak, but rather the dollar which is strong (for the reasons stated above: rising rates and flight to safety). In reality, the euro is holding up well against other strong currencies (the Swedish or Norwegian kroner and the Swiss franc in particular) because the central banks intend to maintain long-term parity policies so as not to disrupt trade. Despite all the worries hanging over the old continent, the euro is holding up pretty well for now. It is really the USD that is exploding, no doubt because, for the moment, only the FED has strongly tightened its monetary policy, when the policy of the ostrich prevails in the EU and in Japan.

But let’s come back more strictly to the EUR/USD pair. It is customary to say that a weaker currency is good for exporters (provided that their main outlets are not seized up, that is to say, for example, that emerging markets are not plunged into a crisis ) and the difficulties of importers. The big winners will therefore be groups with cost structures in EUR but a lot of international invoicing in USD. Conversely, the big losers will be groups with cost structures in USD but a lot of invoicing in the euro zone in EUR.

A mixed impact

In reality, it is quite difficult to see clearly. For example, we can certainly invoice in dollars, but if the cost structure is also in USD, then the effect is neutralized. We can see quite clearly how groups such as LVMH or Hermès can take advantage of this new paradigm, or energy companies like Uniper or cement companies like LafargeHolcim or Vicat, for example, can suffer from it, but it is quite difficult to draw conclusions.

It is important to emphasize that the impact of the depreciation of the EUR against the USD is possibly more mixed than we think, in particular because the boost in export activity offsets the rise in the cost of certain imports. François Villeroy de Galhau, the director of the Banque de France, who also sits on the executive board of the ECB, estimates that each time the euro depreciates by 10% against the dollar, it adds an additional 0.2% to inflation. A limited impact.

Furthermore, the situation presents a upside* important for the euro as a reference currency, especially for emerging countries, which are more tempted to trade in euros when possible if it is more accessible than the dollar.

Is parity tenable? Probably not because, unless it wants to follow Japan’s trajectory, the ECB should also soon change its monetary policy. Moreover, the United States does not look favorably on a EUR which would thus become too competitive. We all remember Trump’s declarations—who, beyond the caricatural character of the character, at least had the merit of saying aloud what everyone is thinking quietly—who accused the ECB of “inevitably” manipulating the EUR at the decline against the USD to boost the international competitiveness of euro zone countries. In the long term, in fact, everyone seems to have an interest in finding the average rate of 1.2/1.3USD for 1EUR which guaranteed an economic and geopolitical balance.

What to conclude from all this? First, that it is very difficult to draw reliable conclusions on the real impact of variations in the EUR.USD pair. Next, that as investors, however, we will favor opportunities in the euro zone (they are not lacking these days: subscribe to Zonebourse.com to discover plenty) than in North America. And finally, that currency fluctuations are permanent, like financial markets in general, and that it is always wiser to watch the cycles go by, taking things philosophically and remaining focused on the very long term.



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