The Euro Could Devalue Further: What Analysts Are Saying

Analysts are puzzled about how low the euro could fall following its parity with the US dollar for the first time in 20 years. Ultimately, rising energy costs and inflation are diminishing living standards, which may incur a political cost, writes Politico.

On Tuesday, the euro reached parity with the US dollar for the first time in two decades. The last time the euro was worth less than the dollar was in 2002. Since the beginning of the year, the single currency has lost more than 10 percent of its value against the US dollar. This rapid decline has been partially driven by worsened growth prospects in the eurozone due to the war in Ukraine and an increased demand for the dollar as a safe-haven currency.

However, not everyone sees this as bad news. A declining currency has its advantages, such as making exports cheaper and more attractive. Yet, EU Economic Commissioner Paolo Gentiloni warned that it would be "incorrect" to view the euro’s decline in such conditions. "Of course, this boosts export opportunities, but we must also look at the negative side of this coin," he said.

A weak euro makes imports more expensive, adding inflationary pressures. One politician who has warned about this risk is Francois Villeroy de Galhau, a member of the ECB's Governing Council. Earlier this year, he cautioned that the central bank would "carefully monitor developments in the effective exchange rate as an important factor in imported inflation." He added that “an excessively weak euro would contradict our goal of price stability.”

Analysts are warning that the euro may not have hit rock bottom, considering the ongoing risk that a halt in Russian gas supplies could lead to a deep downturn in the region. Some suggest that the euro could drop to 90 cents against the US dollar if Russia does not reactivate the Nord Stream 1 gas pipeline.

This scenario could significantly limit the ECB's ability to raise interest rates, something it has yet to do. It is expected that on July 21, the bank will raise base interest rates by 25 basis points, with potential announcements for further increases in September.

At the same time, the dollar is gaining strength as investors rush to US treasury bonds as insurance against economic and political uncertainty.