Discussions about possible parity between the euro and the US dollar continue, though with a lower interest. Most experts suppose that the euro/dollar pair will come to a balance.
Thus, it is a primary task for the euro/dollar pair to find a balance. At the moment, the pair is searching for means to reach it. The euro is supported by a slight downward correction in the greenback. Against the backdrop, the single currency is trying to recover after a slump caused by weak macroeconomic reports and a conflict in Ukraine.
According to the data, in March 2022, the eurozone trade deficit increased to 16.4 billion euros. In January, the trade deficit reached its all-time high amid extremely high energy prices. In March, the EU trade balance totaled 27.7 billion euros.This fact is negatively affecting the European economy. The situation is also aggravated by the Russia-Ukraine conflict. Experts suppose that the eurozone economy is more vulnerable to consequences of the geopolitical crisis than the US one. The latter often ignores geopolitical factors since all its resources are used to cap the surging inflation.
The key interest rate hike is the Fed's main instrument to combat the skyrocketing inflation. However, there are some pitfalls. Economists suppose that a rise in the benchmark rate and strong dollar may threaten global economic growth. In other words, the greenback's appreciation is capping the price growth and supporting demand for foreign goods in the US. However, for foreign economies import prices may jump. This, in turn, may affect economies of weak countries and boost inflation. This may primarily occur in developing economies, which slumped amid the capital outflow.
By the moment, the US dollar has not reached yet a peak of its rally. That is why most traders and investors expect that the greenback's growth may soon come to nought. At the same time, the US dollar index is likely to jump. At the end of the previous week, a six-day increase was stopped. Strategists at ING foresee that the US dollar index may exceed 105 points amid traders' intention to avoid risks.In the light of the global volatility, experts expect a further rise in the key interest rates of leading central banks. The predictions are also supported by economic problems and a prolonged conflict in Ukraine. Under the current conditions, investors prefer putting in money in the greenback, which is still considered a safe-haven asset.
Although in 2023, the US may face recession amid the combat against inflation, the US dollar will still remain a reserve currency. Market concerns about global economic growth are underpinning demand for safe assets. In this case, the euro will again suffer losses since it is more vulnerable in the event of a recession. As a result, the issue of the parity between the greenback and the euro is on the agenda again. According to the calculations of Rabobank economists, such a scenario is hardly possible, but a break of 1.0341, the low of 2017, may lead to parity in EUR/USD.Now, the euro/dollar pair is recovering after the recent bearish movement. On May 17, the euro/dollar pair was trading at 1.0450, leaving its recent lows. Against the background, the parity issue has become of less importance since the euro managed to recoup some of its losses.
In this case, the US monetary policy tightening may have a serious effect on other economies. Most of such economies have a limited potential compared to the US and are displaying weak growth. At the same time, a slowdown in the US economy and the anticipated decline in US inflation growth may lead to a drop in the US dollar. This, in turn, may lower pressure on other economies.
