For a few moments today, a US dollar was worth about as much as a euro. It’s the first time the two currencies have reached price parity since December 2002—and a sign that investors are worried that a looming economic crisis will hit Europe especially hard.
The euro first hit price parity with the dollar in December 1999, just less than a year after its debut at $1.17. For a turbulent three years surrounding the 2001 dot-com crash, the dollar remained stronger than the euro. Worried investors treated the US currency as a safe-haven asset to hold during the burst of the tech bubble. But after 2003, the euro has remained stronger than the US dollar.
Since the start of the year, investors have been increasingly worried about a recession hitting soon (or, perhaps, that a recession is already here). Rising inflation, interest rate hikes, Russia’s invasion of Ukraine, widespread lockdowns in China, and new covid variants have only fanned those fears.
In times of economic uncertainty, many investors hold dollars because they believe the currency and the assets denominated in them are safer to hold in a crisis. As more investors convert other currencies or assets into dollars and raise the overall demand for the currency, its value is rising.
The dollar’s value is rising particularly fast in relation to the euro because investors are particularly worried about Europe’s economy. The European Central Bank has been slower to raise inflation-taming interest rates than its peers, including the US Federal Reserve. Meanwhile, Russia has been slowly choking off the fuel supply to western Europe in retaliation for the economic sanctions the west imposed on Russia after it invaded Ukraine.
A looming recession combined with an energy crisis and the instability caused by the war in Ukraine could hit Europe especially hard, prompting investors to preemptively ditch their euros in favor of dollars.
The 1:1 ratio between the euro and the dollar is a psychological threshold for investors. Technically, the euro still hasn’t exactly hit price parity with the dollar. But there were at least 10 separate moments between 4:19 and 5:45am US eastern time today, when the dollar traded for 0.9999 euros—essentially equal value. Over the next few days, the dollar might trade a few cents above or below the euro, but it’s unlikely to swing much further than that.