Since the beginning of 2022, the euro has depreciated by almost 15% against the dollar. The trend is all the more pronounced as it increases year on year. This depreciation of the euro against the dollar is affecting the real economy and the consequences have both negative and positive effects. The current currency configuration would support European exports, making domestic products more competitive by attracting foreign investors.

However, there are also negative effects such as higher import prices and the risk of higher government bond yields. The single currency, at its lowest level for 20 years, also threatens an economy already facing inflationary peaks. So why is the euro falling against the dollar and what are the consequences?

Why is the euro falling against the dollar?

Rising energy prices combined with a wider deterioration in the outlook for the Eurozone have led to a fall in the European currency. Germany's and Italy's heavy reliance on Russian gas has worried investors, with economists predicting a much faster and more painful recession in the eurozone than in the US.

Added to this is the difference in interest rates between the US and the eurozone. In the fight against inflation, the US Federal Reserve has become more aggressive in raising interest rates. The latter has increased by 225 basis points since March, or 2.25%, while the European Central Bank (ECB) has only increased by 50 basis points so far or 0.5%.

The US dollar is also benefiting from its safe haven appeal. Amidst the uncertainty surrounding the global economy, investors are reassured by the relative safety of the dollar, which remains less exposed.

What are the consequences of the euro's decline for financial and currency markets?

The depreciation of the euro is currently one of the catalysts for rising inflation in the European Union. Rising inflation reduces consumer purchasing power, a factor that worries both citizens and governments in European countries.

Already very high levels of public debt are expected to rise as the euro depreciates, which is seen as critical. This could lead to higher long-term interest rates, which reduce access to credit and limit investment. This is counterproductive at a time when the economy needs capital to recover from past health crises.

Similarly, in the case of companies, the consequences of a weaker euro against the dollar vary according to their dependence on foreign trade and energy. Companies exporting outside the euro area benefit from a weaker euro, as prices are more competitive (when converted into dollars), while importing companies are more penalised.

On the other hand, operating costs; linked to raw materials and energy, will explode for local companies that make up the economic structure of the European economy, and export little.

On the money market and more particularly the gold market, gold, which, like most commodities, is traded internationally in dollars, is one of the main victims of the strength of the dollar. In 2022, gold prices peaked in March-April.

In addition, international affairs and the deflation of the European currency directly affect this price. Central bank rates, banknote printing, government bonds and treasury bills support the economy and drive down gold prices in the short term. At the same time, central banks are buying more and more gold as a safe haven. For individuals, inflation and a weaker euro reduce purchasing power.

The currency depreciates, forcing households to spend more. Investing in gold would therefore allow individuals to protect themselves and maintain their purchasing power.

Thus, this precious metal, which is rare and outside the system, remains stable and will not disappear even if the stock market or the banks collapse. In addition, the taxation of gold encourages investment.