There was a day when Mario Draghi irritated Donald Trump. In 2019, the then president of the European Central Bank (ECB) announced that he would unleash whatever artillery was necessary to prevent inflation from collapsing. The markets reacted immediately: facing the possibility that the ECB would launch more stimulus, the euro fell sharply against the dollar. For months now the Italian had been warning about the contribution of a strong euro to anemic inflation, which was also penalizing European exports. So those words turned on Trump, in front of the United States, who did not hesitate to use his Twitter account to attack Draghi.
Three years later, the situation is the opposite of then. Europe must not conspire against deflationary risk, but against runaway prices. The increase in the cost of energy is the main explanation for the high rate of inflation in the euro area, which in April stood at 7.5%. Behind this brutal increase in the cost of fossil fuels —and raw materials— there are above all two factors: a mismatch between supply and demand at the end of the pandemic, and the war in Ukraine. But there is also a third party that is giving much less to talk about: the exchange rate, which is also having an amplifying effect —and not a small one— of this upward movement. With both oil and major commodities priced in dollars, the greenback’s strength against the euro is further driving up the price of these essential goods in the engine room of any modern economy. And that, in turn, is putting even more pressure on inflation, the number one economic problem of our day.
The logic behind this phenomenon is simple: the more expensive the dollar is against the euro —as it is now—, the more European buyers have to pay for basic products such as oil, copper, iron or soybeans. To give an example: the barrel of brent It has risen almost 60% in one year, but converted into euros, the real increase exceeds 80%. “This generates pressure on import prices and, therefore, on the costs of the companies’ production factors, which transfer it to the final price,” says Javier Pino, an analyst at International Financial Analysts (AFI).
Brussels has been worried for some time. Europe, the largest importer of energy in the world -with an annual bill that, according to its calculations, amounts to 300,000 million euros-, signs the majority of energy contracts in euros and the single currency continues to try to find a lever to boost the international role of the euro. Fortunately for the community partners, natural gas —which has increased fivefold in price in less than a year— is an exception to the general rule that raw materials are priced in dollars: they are traded in euros. “If it had been the other way around, the impact would have been even greater,” he points out. Neil Shearing, chief economist at the British consulting firm Capital Economics. “It is like that, yes, but there also ends up being an exchange rate effect: whether or not it is quoted in dollars, in the end everything ends up being referenced to that currency,” he adds. Daniela Ordonezfrom Oxford Economics, one of the analysis houses that disagrees with the consensus and is betting that the euro will not continue to weaken against the dollar in the medium and long term: “The European trade surplus is huge and Germany is not going to let to export”, sentence.
He knows in depth all the sides of the coin.
Pushed down by the growing monetary policy gap between the Fed and the ECB, in the last year the common European currency has lost almost 15% against its US counterpart. Far from tempering this dynamic —and except for a radical turn of events in Russia—, more and more analysis houses and investment banks see both currencies on the way to parity in the medium term. A milestone that, if it occurs, would be bad news for inflation in the eurozone.
The trajectory is much less accelerated, in the crosses of the euro with respect to the rest of the major international currencies: against the Swiss franc, the accumulated fall in the last 12 months is 7% (half that in the case of the dollar); Against the pound, it is down just 3%, and against the Japanese yen, the single currency is even gaining ground. With these figures in hand, it is logical that analysts, such as Shearing, prefer to talk more about the strength of the dollar than the weakness of the euro. Today, a greenback is exchanged for $1.05, a far cry from the $1.25 at the beginning of 2018 or the $1.22 a year ago.
The economic turmoil caused by the first war on European soil in 30 years —which has taken fuel, gas and electricity to record highs— is also having a direct impact on the exchange rate: the more energy rises, the more it suffers the European economy, by far the most exposed to Russian supplies. And the more the euro weakens against the dollar, in a spiral with traces of a vicious circle. “Fundamentals would lead to a stronger euro exchange rate. But there are other factors that weigh, such as the differential with the monetary policy followed by the US, which makes capital flows go where they are better paid. But the war, which is taking place in Europe, also depresses the euro”, says the director of the Funcas situation, Raymond Torres.
In a period of high volatility like the current one, the US currency is also spurred on by its status as a stable currency. “The dollar continues to be seen as a refuge value, and that also contributes to strengthening its price,” Shearing reveals. The ECB has already shown its concern that the collapse of the euro is a path to a greater rise in prices: “Obviously, it is an issue that we are attentive to, because it does have an impact on inflation, which is the key to all our concerns”, said the president of the institution, Christine Lagarde.
But the strength of the dollar, as Trump bitterly lamented in 2019, also harms the US. In the first quarter of the year, the US economy contracted for the first time since 2020, in full lockdown. Among other imbalances, analysts highlighted the drop in exports (-5.9%) and the rise in imports (+17.7%). In both cases, the exchange rate plays a role that is not unique but relevant.
“The fact that the dollar is strengthening favors the euro zone in terms of exports. And that has been seen in the GDP data for the first quarter in the US. But it harms us due to the rise in energy prices, which we contract in dollars”, explains the head of BBVA Economic Analysis, Rafael Doménech. In Spain, during the first quarter the opposite was seen, so that the foreign sector made it possible to offset part of the fall in household consumption.
Good news for exporters
The weakness of the euro against the greenback is, in general, as bad news for consumers as it is good news for the European nations and companies that sell the most abroad. “A weak euro is certainly good news for them, although they are also experiencing high energy and supply costs,” Shearing warns. The improvement, he says, will go above all on the side of margins, which will be higher, than on the billing side: “They will not be able to sell more for one reason: because they hardly have idle capacity.”
The exchange rate, however, “does not affect eurozone exports as much as one might think, because they are led by high-tech sales, in which competition is less and the purchase decision is not so linked to price. ”, complements Ordóñez. “It does help, on the other hand, to exports of less technology and in tourist flows. There they can be especially benefited in countries like France, Italy, Spain, Portugal or Greece. On the other hand, at the eurozone level the impact will be small”.
Companies also suffer, on the other hand, the rise in the cost of energy. “Now, it is not the only productive factor. And if a good is going to be exported, in general that drop in the euro is beneficial for us to sell abroad”, says Joan Tristany, general director of the Association of Internationalized Industrial Companies (Amec). The entity points out that, likewise, the weakening of the dollar is allowing Spanish companies to compete in better conditions with North American firms that operate in Europe.
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