Soft currency Euro: This means the US dollar parity

As stable as corporate earnings in the euro zone have been so far, the macro situation could not be worse. Waiting for the recession, a slump in corporate profits, is omnipresent. Expect the worst and, ideally, be positively surprised is the motto, which you can currently get a lot out of.

Asset prices, inflation and the key interest rate are not the only things that provide information about the situation. It is above all the euro-US dollar parity that serves as an indicator of the state of the euro zone. The result is devastating. A year ago, in July 2021, you got the equivalent of 1.20 US dollars for one euro. Now you only get one 1:1 exchange ratio. In just a few months, the euro, the “second largest” currency after the US dollar, has been de-confident.

Euro: How did the loss of trust come about?

Of course, there isn’t ONE reason that affects exchange rates. However, the following points are likely to have had a greater impact on the weakness of the euro and the strength of the dollar:

1. Europe is more dependent on Russian energy than the US, so the risk of an escalation is correspondingly greater.
2. The European Central Bank is reacting more hesitantly to rising inflation than the US Federal Reserve; Generally lower key interest rate level as the European economy is less resilient.
3. The USA can implement (political) measures more consistently than the eurozone community.
4. Divergence between the euro members: It is becoming more and more difficult to “reconcile” debt and economic performance or to reflect this with a common external value of the common currency.
5. In times of great uncertainty, the world’s leading currency, the US dollar, benefits more than the euro.

Foreign currency euro

In addition to the points listed, there is another difficulty: the euro is a kind of foreign currency for the euro members themselves. Since the money monopoly does not lie with the national state, but with the supranational institution ECB, Germany, Italy, France and Co. cannot simply print money when they need it.

This is a special feature. Normally, a state cannot “go bankrupt” because it can instruct the central bank – alleged central bank independence or not – to print its own currency indefinitely. However, the euro member countries do not have this privilege.

As long as the ECB keeps interest rates low and buys government bonds, especially Italian government bonds, that is not a problem. In this case, the debt service does not pose a threat to the state budget and fresh liquidity is ensured. According to the ECB, that is exactly what should be over now. Due to the high inflation, she too would like to refrain from buying up the bonds of the euro member states, while at the same time raising the key interest rates.

European Central Bank: The unresolved dilemma

The question that now arises: What happens when highly indebted countries like Italy slide into recession and can no longer service their debts or service their expenses?

Basically, there are only two options: the ECB changes course and buys government bonds again, or the country in question has to leave the monetary union, devalue it and reintroduce its own currency. It is precisely this euro-specific problem that is likely to contribute to the fact that the euro is as weak against the US dollar as it was shortly after its introduction.

Weak euro vs. strong euro: which is better?

Now the objection may come that a weak euro helps the German export economy, since the goods we produce become cheaper and German companies can sell more as a result. While this argument is not wrong per se, it falls far short of the mark.

On the one hand, we have to import many goods, especially raw materials and semi-finished products. On the other hand, due to their complexity, the goods we manufacture are less price-sensitive than simple products from emerging countries. A not inconsiderable proportion of German exports go to other countries in the euro zone, which also cannot benefit from it.

Instead, our consumption of imported goods in this country is becoming more expensive. After all, we get fewer and fewer foreign goods for one euro, which have already become more expensive due to inflation and the supply chain. The new iPhone from Apple is not only more expensive because of inflation, but also because we have to put more euros on the table when importing than a year ago. Consequently, both a strong and a weak euro have their advantages and disadvantages, which ensures that the argument has always been heated.

It is important to note here that inflation and the euro exchange rate are two different things. Although the US has higher inflation than the eurozone, the US dollar is appreciating against most other currencies.

US dollar and bitcoin: what does this mean for investors?

Anyone who has always found it annoying to convert between US dollars and euros can now rejoice. A bitcoin worth $22,000 is also worth $22,000 — handy. However, the relative appreciation of American assets is likely to be far more important than this convenience. Anyone who owns assets denominated in US dollars can look forward to currency gains, and vice versa.

For example, owners of stablecoins, which in most cases are based on the US dollar, can count themselves lucky with their virtual foreign currency account. A stronger US dollar also leads to an increase in US stocks in the portfolio. Anyone who owns US shares can look forward to a currency-induced price increase of around 14 percent since the beginning of the year. The downside is that this principle also works in the other direction.

So those who are not overly optimistic about the future of the euro can benefit from moving into non-euro denominated assets. Theoretically, cryptocurrencies such as Bitcoin can also help to compensate for such euro currency losses.