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If you still haven’t planned a summer vacation, you might want to do it quickly. Europe seems pretty cheap right now.
For the first time in 20 years, the dollar and the euro are worth roughly the same. They flirted with what currency traders call “parity”.
That means American travelers won’t pay extra for a hotel room in Barcelona, tickets to the Paris Opera, or a full dinner in Rome.
This makes Teresa Valerio Parrot happy. She and her husband are celebrating their 25th wedding anniversary this year.
They thought about taking a trip to California or Hawaii, from their home in Colorado. Flights are expensive everywhere, but thanks to the strength of the dollar, Europe has started to become very attractive.
“We quickly realized that it was going to cost about the same price to go to Paris as to stay in the United States,” explains Valerio Parrot.
So, in September, they leave for France.
“We plan to go there, drink some great wine, sip some bubbles and bring back a whole lot of memories,” she says.
The last time they were there, in 2013, one euro was worth around $1.30.
Why the dollar is king now
At a time when the whole world is facing high inflation, worries about a global recession and markets rocked by immense volatility, the dollar has become an island of safety.
The dollar has appreciated more than 10% against global currencies since the start of the year.
This means that people have to put less dollars in exchange for other currencies. At the start of the year, for example, it took $1.13 to buy a euro, compared to just $1 today.
It may seem counterintuitive that the dollar is strengthening at a time when there is so much fear about the future of the US economy.
Inflation last month rose 9.1% from a year ago, with prices rising at their fastest annual pace in more than four decades. To combat high inflation, the Federal Reserve raised interest rates aggressively, fueling fears that the Fed’s policies could lead to a recession.
However, they also help increase the value of the dollar.
“Higher interest rates generally lead to a stronger currency,” says Jane Foley, head of foreign exchange at Rabobank. “It’s the economy of textbooks.”
This is because investors are starting to chase after dollar-denominated investments that will lead to higher returns, compared to assets in other currencies.
The Federal Reserve is not the only central bank trying to control inflation by adjusting interest rates, but so far it has done more than others. The European Central Bank plans to raise interest rates at its next meeting later this month.
The dollar is also the dominant currency in the world
Another reason is that the dollar plays a unique role in the global economy.
“The dollar has its own fundamentals,” says Foley. “Generally, a currency will react to the fundamentals of the country it belongs to. This is not necessarily the case with the US dollar.”
It continues to be the dominant reserve currency. Countries around the world keep a lot of dollars on hand because they consider it a safe asset.
What explains the weakness of the euro?
Eurozone countries are also facing high inflation and there are fears that a recession is imminent.
However, the main concern in Europe is energy prices.
After Russia invaded Ukraine, the United States and its allies imposed a wide range of sanctions and restrictions on Russian oil and natural gas. This drove prices up and Europeans were particularly affected.
Although gasoline prices have fallen from record highs and oil has once again traded below $100 a barrel, there are fears that the situation in Europe could deteriorate further. This is largely due to the fact that Russia is the largest supplier of oil and gas to European countries.
This week, the Nord Stream 1 pipeline, which carries natural gas from Russia to Germany, was taken out of service for scheduled maintenance.
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This work is supposed to take 10 days, but there is speculation that Gazprom may not restore the flow of natural gas, or that the Russian gas giant may reduce production.
If European countries are unable to build up their reserves in the summer, they may have to ration gas in the winter, which could lead to a broader slowdown.
Factories would have to cut production, which could lead to layoffs, and the chances of a recession would become even higher.