Euro worth as much as dollar?

Since the start of this year, the Euro has lost a lot of its value compared to the dollar. Compared to the exchange rate a year ago, the Euro even lost 22.5% of its value. One Euro is now worth about 1.06 dollars. Over a year ago, the Euro was still worth a record 1.40 dollars. Financial markets and economists are already speaking of a possible 'parity', the moment when both currencies will have equal value. The last time the Euro and the dollar had equal value was in 2002. What is causing the falling exchange rate, and is this a problem?

The cause of the weaker Euro is largely attributable to the policy of the European Central Bank. Last year in May, the president of the ECB, Mario Draghi, announced that the value of the Euro was "a serious concern", and that "all instruments" would be used to get the European economy going again. In September, the ECB lowered the interest rates, and also announced that buying government bonds would be considered. On January 22, Draghi presented a plan: for nineteen months, every month 60 billion Euro would be pumped into the economy. That amounts to a total currency boost of 1140 billion Euro. Simply put, this means that more Euro will enter the market. And according to the law of supply and demand, the price goes down when supply goes up.

The point at which the dollar and the Euro will have equal value, is nearing for the first time since 2002.

Growth figures adjusted
Banks can sell government loans to the ECB. In return, the banks must use the capital for investments in companies or mortgages. Earlier this month, the buying scheme started, and an overview made by Dutch television showed that the interest rates on various government bonds from several countries immediately went down.

The combination of the buying scheme, a low oil price and a weaker Euro, has caused the ECB to adjust the economic forecasts for Europe upwards. According to the latest estimates, the European economy will grow by 1.5% this year. In 2016, the growth should reach 1.9%, and for 2017, a 2.1% growth is expected. Inflation will remain low: for this year, it's expected to be 0%. For 2016 and 2017, higher inflation figures are expected though: 1.5% and 1.8% respectively.

Abenomics
Incidentally, it's not unique for a Central Bank to pump billions into the economy. The American FED has pumped more than 4000 billion dollars (3600 billion Euro) into the American economy since the crisis in 2008 started. In Japan, a similar stimulus package started, named 'Abenomics', after Japanese prime minister Shinzo Abe, with hundreds of billions being pumped into the Japanese economy.

Advantage Europe, concerns in Washington

Is the decreasing value of the Euro a problem? Not in principle, the economic forecasts have also been adjusted upwards for the Netherlands because of the cheaper Euro. That's because a cheaper Euro is good for European export. Products from the Eurozone will be relatively cheaper for consumers outside the Euro. This gives European companies a bigger competitive edge, which could have positive consequences for European exporters.

In Washington, on the other hand, concerns are voiced regarding the dollar's stronger position. For American exporters, this means that their products are becoming relatively expensive. American multinationals, meanwhile, are reckoning with negative consequences of the exchange rate for their revenue and profit. Because for every Euro being exchanged, they'll get fewer dollars.

source: wsj.com

Incidentally, the Euro isn't the only currency that's lost value compared to the dollar. Since June last year, the value of various currencies around the world decreased.