EconomyWhy is the euro now worth the same (or...

Why is the euro now worth the same (or less) than the dollar?

(Expansion) – The euro and the dollar reached a parity not seen for a little over 20 years. While in 2018 one euro could buy up to 1.40 dollars, today (data as of July 20) the value of the euro is barely 1.02 dollars.

Since the summer of 2002, the coefficient between the euro and the dollar has not been below 1, which is the exact parity between the two. The foregoing undoubtedly generates a significant impact on the markets and, of course, implies new challenges and opportunities for investors who have their capital in foreign currency.

Given this scenario, first, we must understand the reason for this parity. There is a strong depreciation of the euro since last year, accentuated by the war between Ukraine and Russia. Undoubtedly, this event generates uncertainty and fear in investors, who thus decide to take refuge on the other side of the world in currencies such as the dollar. On the other hand, we must contemplate the world inflationary panorama, which has generated the response of the central banks and, as a consequence, the strengthening of other currencies.

This, added to the fact that last month the Federal Reserve of the United States raised the interest rate by 75 base points, which generated a strengthening of the dollar against other currencies. Data indicates that the dollar advances 11.37% so far in 2022 against currencies such as the yen, the pound sterling, the Swedish crown, the Swiss franc and of course the euro.

On the contrary, the European Central Bank has remained inactive in this regard, and the rest of the markets are waiting for the body to make a monetary decision that will help contain the fall of the euro.

Given this, the recommendation is not to focus all attention on the strengthening of the dollar when investing, but to pay attention to the behavior of its counterpart. In this way, for example, it can be foreseen that the weakening of the euro will continue, which makes this currency an unviable option to continue diversifying the investments of those who decide to do so in currencies.

On the contrary, it is essential to diversify investments in dollars. That is, not only do it in the currency exchange, but opt for various instruments valued in the US currency, such as shares and even cryptocurrencies.

Stocks and digital currencies valued in dollars are a protection measure to continue with the returns generated by the price of the dollar and, at the same time, amortize possible price drops in the peso-dollar exchange rate with a composite portfolio, in case they show up.

Finally, you can also go to CFDs, that is, to contracts in which the seller will pay the buyer the difference between the value of the currency at the time the operation was made and the closing value.

Editor’s note: Eduardo Abarca is founder and CEO of Aurea Capital Markets. Follow him on LinkedIn. The opinions published in this column belong exclusively to the author.

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