As the euro continues its dramatic decline, economists are wondering just how far it will fall before leveling out.
Europe's single currency has dropped 25 percent since May, when it traded just shy of $1.40. On Wednesday, it hit a 12-year low against the dollar as it fell as to $1.0557, its weakest rate since April 2003.
The euro has fallen against many currencies, but its drop has been particularly pronounced against the dollar, declining 12.8% against the greenback in 2015 alone. Analysts attribute this decline to ECB's massive bond-buying campaign which they say has been weakening the euro and to the U.S. Federal Reserve's moves that are bolstering the dollar.
According to economic mavens, the dollar’s 12-year high can be seen as a sign of a weak euro which is needed to keep the eurozone out of a triple dip recession and to avoid deflation.
Generalizing recent market trends throughout the world, where the currencies of Canada and Mexico, America’s two largest trading partners, have also been depreciating against the dollar, analysts are predicting that the euro could fall to parity with the dollar very soon.
Michael Hewson, chief market analyst at CMC Markets, said: “For now the euro looks to be headed towards parity . The next target sits at 1.0500 and it remains a very short hop from there to parity.”
A euro-dollar parity is a uncommon and occurred last in November 2002. When the euro was first introduced in 1999 this monetary position between the two currencies also took place.
Why now?
So why is this happening now?
Both the euro and the dollar rates are set by the supply and demand in the markets and not by a central bank. Currency demands are what move each currency. Price fluctuations are based on several factors such as expected inflation or deflation of the currency over time, the amount of currency reserves in place and interest rates.
Due to aggressive stimulus moves by the European Central Bank’s quantitative easing policy, whereby it is buying bonds off the public-private markets in exchange for cash, the supply of euros has been increasing. The more euros in the market, the cheaper its value and its purchasing power decreases accordingly, making it a less valuable currency to hold onto and prompting consumers to move their cash to assets in more stable currencies with more purchasing power, most noteworthy-- the dollar.
To add oil to the burning fire, the Federal Reserve has made known that in the very near future it will raise interest rates and reduce the money supply, making dollar-denominated assets even more valuable.
Consumers and Businesses
What does this all mean to consumers and businesses?
There are many American businesses that operate in Europe and a dollar-euro parity would make their products more expensive. In addition, earnings from sales in Europe will be diluted and will be worth less than they used to be as soon as they cross the ocean.
On the other hand, the elimination of currency exchanges will give U.S. consumers the opportunity to pay less when purchasing European imports and will have a direct effect on traveling abroad or investing in foreign markets.