The energy shock pressures the euro: heads and tails of a weak currency

Euro logo with the stars of the European Union, at the ECB headquarters. / Reuters

The currency loses parity with the dollar again due to the decoupling in the economic perspectives between Europe and the US

Clara Dawn

The drums of recession in the euro zone are once again beating loudly and hitting the euro with special intensity, which this Tuesday repeats falls in its crossing with the dollar. The single currency bids farewell to parity at $0.9921, renewing 20-year lows and showing that investors are no longer fleeing the currency just because of the difference in the pace of interest rate rises between the US and the euro zone , slower in tightening monetary policy.

Beyond the gap between the central banks of both regions, the big problem that the market observes is rather the decoupling in the economic perspectives, with a euro zone that is much more dependent on energy and, therefore, is suffering much more the energy shock resulting from the war in Ukraine.

A chaos that this Tuesday led European gas futures contracts, which are traded on the Dutch TTF platform, to exceed 295 euros per megawatt hour (MWh), their highest level since the record of 345 euros/MWh reached in March.

The enormous energy dependency of the European Union has caused a series of crises of confidence among investors in the region, which has led to the loss of parity between the euro and the dollar which, as Gabriel Debach, market analyst at eToro, reminds us, it was seen so continuously since the dot-com crash, when the exchange rate hit record lows of $0.82.

“The new energy pressures keep the single currency in suspense. Just think that in just over a month, from July 14 to today, TTF prices have increased by more than 213% », he indicates. "This situation has serious repercussions for European economies, especially for Germany." It is not only about the impact of the rise in energy on inflation, but also the domino effect that this generates in the activity, with consumers cutting expenses from other items to face the rise in the energy bill or companies that are forced to curb their investors in the face of the decline in activity.

The weakness of the euro is a sign of those fears. And this situation has its face and its cross. But, in general, it harms more than benefits European households, which lose purchasing power with the fall of the currency.

more expensive purchases

One of the main drawbacks of the weak euro is that it is also more expensive for the region to buy products denominated in other currencies. And, among them, energy imports and other raw materials such as minerals, cocoa, cereals stand out... all of them denominated in dollars. And, with them, the manufacture -and subsequent sale- of products based on these materials will also become more expensive.

imported inflation

Imported oil and gas will thus be more expensive because of the exchange rate. And that could put even more pressure on inflation already rampant at 9.8% in July in the euro zone (10.8% in Spain).

"A weak euro is inflationary, because everything we buy abroad is more expensive," insists Víctor Alvargonzález, director of strategy and founding partner of the independent advisory firm Nextep Finance. "And outside we buy energy and raw materials, so right now in the midst of an energy crisis, having a weak euro is the worst thing that can happen to the European economy because, I insist, we import inflation just when we least need it," he says. .

A situation that is especially worrying for large energy importers such as Spain. According to data from the Tax Agency, energy products represented 22.2% of total imports in the country in April (latest data available). In other words, they are the products that we import the most, ahead of capital goods and chemical products.

More pressure on the ECB

Thus, another of the great victims of a weak euro is, without going any further, the ECB itself which, in order to defend the currency against the strength of the dollar, should speed up interest rate rises, complicating its plans in the rhythm normalization of monetary policy.

Big exporters

"If we did not have the serious inflationary problem that we have in Europe and especially in Spain, a weak euro would not be so serious, since it helps to sell better abroad, since our products are more competitive in price when our currency is devalued", Alvargonzález explains.

eToro analysts also indicate that business giants such as Airbus or ASM are the great beneficiaries of this situation, recalling that "more than 50% of European corporate sales come from abroad, compared to only 30% of US companies"

However, in a recent analysis, José Manuel Villamor, director of Weather Management at A&G, considered that "exports will increase by less than imports fundamentally due to the energy deficit." In other words, the improvement in final competitiveness that can be achieved against external partners that sell in dollars with the 'devaluation' of the euro will not be too important in the evolution of the final trade balance.

Tourism

One of the great beneficiaries of the weakness of the euro is, without a doubt, tourism, one of the economic engines of countries like Spain. For travelers from the US, for example, the euro zone is now much more attractive than before, since with each of their dollars they will be able to buy many more things than before. Something that in turn benefits leisure, restaurants, commerce, etc.

The downside is for travelers from the euro zone who want to go to the US, as they will have less spending power (they will give you fewer dollars for each of your euros).

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