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Why Did The Euro Drop Below the Dollar for the First Time in Two Decades?

Dólar, El American

[Leer en español]

On Wednesday, the euro briefly fell below the dollar after reaching parity for the first time in 20 years, following the Labor Department’s release of the Consumer Price Index (CPI), showing inflation of 9.1% in June.

For the first time since December 2002, the exchange rate plunged to $0.9972 per euro.

Dollar vs. Euro: U.S. inflation and Russian invasion of Ukraine

According to an analysis by the German magazine Der Spiegel, the sudden strengthening of the dollar is because, given an all-time high in inflation rates, investors speculated about further interest rate hikes by the Fed.

“The common currency [the Euro] is under pressure due to an impending recession and the lower level of interest rates in the Eurozone compared to the U.S.,” says the article. “The U.S. Federal Reserve is taking a tough stance against high inflation and has already raised interest rates several times. That strengthens the dollar.”

Along with the strengthening of the U.S. currency, the invasion of Ukraine has put a strain on Russia’s supply of energy to European countries, which has strongly affected the prospects for economic growth in Europe.

Moreover, the Fed has been raising its federal fund’s target rate since March, further strengthening the dollar to curb rampant inflation.

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