Why the euro has fallen to $1, what it means for the rupee
- Euro achieved parity with US dollar.
- Exchange rate: One euro equal to one US dollar.
- This is second time since 2002 that euro has fallen this low to a dollar.
- It shows that investors are pulling out money from Eurozone and into the US.
Reasons Behind the Fall
- Covid-19 pandemic and fiscal response to counter it left eurozone with weak economy facing high inflation.
- Russia’s war on Ukraine and ban on Russian energy left European economies vulnerable.
- Germany: Biggest Eurozone economy, registered its first trade deficit since 1991.
- Companies are shifting base to US, which is far more independent in energy terms.
- Monetary policy response by European Central Bank (ECB) is another reaason.
- US Fed is raising interest rates, even if that brings in a recession but ECB hasn’t moved.
Performance of Indian rupee
- Indian rupee, despite its continued weakness, has shown more resilience against dollar than most other currencies.
- Rupee has sharply appreciated against euro since the start of 2022.
Does that mean the euro’s fall will help the rupee?
- If euro continues to weaken, rupee, will further weaken against the dollar.
- Reason: Euro has immense trade linkages with India and similar emerging economies.
Prelims take away
- Eurozone
- Purchasing power parity