Everything explained: Euro hits parity with US dollar for first time in 20 years. Why does it matter?

PHOTO: Unsplash

For the first time in two decades, the exchange rate between the Euro and the US Dollar has reached parity.

It has fallen to its lowest level since 2002, even briefly dipping just below a one-to-one exchange rate with the US currency at times last week.

Even more extraordinary than breaching this parity is how quickly the euro has dropped against the dollar. The currency, shared by 19 European countries, has tumbled more than 12 per cent this year, as the dollar strengthened against almost every major currency in the world.

The symbolic, perfect parity has become a focal point for investors. More than that, it’s an important psychological distinction in today’s macroeconomic climate. In a note to clients, analysts at Dutch bank ING mentioned that ‘1.00 is probably the biggest psychological level around’.

One-Year exchange rate between EUR and USD.
PHOTO: XE.com

History of the Euro

Introduced in 1999 after decades of discussion and planning, the Euro was established with the intention of bringing unity and prosperity to the continent. After two major wars in the 20th century, the arguments for the Euro were that common institutions would reduce the risk of war and provide avenues for conflict resolution.

As a result, the Euro was a critical symbol of this unity.

In 2002, the Euro rose above parity as large trade deficits and accounting scandals on Wall Street ravaged the dollar. Since then, the Euro has been battle-tested with multiple challenges - from the global financial crisis in 2008, to Greece’s debt crisis bailout in 2010.

However, as the Russian war on Ukraine challenges Europe’s political and financial stability, a vast number of factors have been mounting against the Euro. Investors have turned their attention to the US Dollar, which reasserted itself as a safe haven during economic upheaval.

The reason behind Euro’s weakness and US dollar’s growth

Many analysts have attributed the Euro’s slump to expectations for rapid interest rate hikes by the US Federal Reserve to combat 40-year highs in inflation. On Wednesday (July 13) last week, it hit an annual rate of 9.1 per cent.

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As the US Federal Reserve increases interest rates, the rates on interest-bearing investments tend to rise as well. If the US Federal Reserve raises rates more than the European Central Bank (ECB), higher interest returns will attract investor money from Euros into Dollar-denominated investments.

Those investors will have to sell Euros and buy US Dollars to invest in these products. That drives the Euro down and the US Dollar up.

The ECB has announced it will raise interest rates next week. But raising interest rates too much and too quickly might cause the economy to sink into recession.

Meanwhile, the US economy looks more robust, meaning the US Federal Reserve could go on raising interest rates, and hence widen the gap even further.

What are the impacts of the parity?

Nord Stream natural gas pipeline to Europe.
PHOTO: Reuters

American tourists going to Europe will find cheaper hotels, restaurant bills and admission tickets. The weaker Euro could make European exports more competitive in the United States - which means cheaper European goods for Americans.

A weaker Euro can be a headache because it can mean higher prices for imported goods, particularly oil, which is priced in Dollars.

This is particularly concerning as Russia has shut down the supply of natural gas to Europe through the Nord Stream 1 pipeline, to carry out scheduled maintenance. Europe fears that Russia might decide to shut it down for good, in retaliation against Ukraine war sanctions.

On the other hand, a key worry for the United States is that a stronger dollar makes US-made products more expensive in overseas markets. For the Singaporean consumers like you and I, this means our electronics purchased from Amazon might become even more expensive.

Singapore’s response

1-Year exchange rate between EUR and SGD.
PHOTO: XE.com

In an off-cycle policy decision, the Monetary Authority of Singapore (MAS) had once again moved to tighten its monetary policy in an effort to stave off inflation. Shortly after MAS’s announcement, the Singapore Dollar rose against major currencies like the USD, Euro, Yen and Ringgit.

This has resulted in a spike in demand for these currencies across multiple money changers. With the lifting of many Covid-19 travel restrictions since the start of the year, many Singaporeans are looking to stockpile foreign currency while the Singapore Dollar is strong.

Currency USD to SGD EUR to SGD GBP to SGD SGD to JPY SGD to MYR
Jan 2022 1.34 1.53 1.84 84.7 3.10
Feb 2022 1.34 1.52 1.82 85.7 3.11
Mar 2022 1.36 1.49 1.77 86.5 3.07
Apr 2022 1.35 1.46 1.77 93.0 3.12
May 2022 1.39 1.44 1.70 92.8 3.16
Jun 2022 1.39 1.45 1.67 97.1 3.17
July 2022 1.40 1.39 1.66 99.0 3.17

As you can see, the Singapore Dollar has been steadily appreciating against many of the most prominent currencies like the Euro, British Pound and our neighbour’s Malaysian Ringgit. Luckily for us, a stronger local currency is in our favour when we decide to go overseas for holiday, or cross the border for cheap petrol and groceries.

Getting the best rates on your currency exchange

Looking to transfer money overseas? Do you have trouble finding the best exchange rate for your overseas remittance?

Don’t worry - we have compiled a detailed comparison of the best wire, remittance and money transfer services in Singapore just for you.

TorFX

Consider this if you want a no-fee service with outstanding service

  • Service fee
    • N/A
  • Government licence
    • MAS - Major Payment Institution
  • Maximum transfer
    • N/A
  • Currencies
    • 60
  • Transfer speed
    • One-two days

TorFX is one of the best money transfer services for those that value customer service. The platform pairs users with a dedicated account manager.

They will assist users as needed, with everything from tracking rates to basic account guidance. Users are given direct contact information for their account manager, ensuring that their customer service needs are met.

On top of this service, TorFX offers transfers to more than 60 different currencies, which are typically completed within one to two business days. It also allows users to make transfers of as little as $150, which is helpful for those that might need to transfer smaller amounts from time to time.

Overall, TorFX is an affordable service with unparalleled customer service. For a more detailed guide, check out TorFX here.

World First

Consider this if you want to send without incurring a transfer fee

  • Service fee
    • N/A
  • Government licence
    • MAS - Major Payment Institution
  • Maximum transfer
    • N/A
  • Currencies
    • 68
  • Transfer speed
    • One-two days

Due to its transparency, strong track record and lack of administrative fees, World First is one of the top international money transfer services in Singapore.

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Snaking queues at money changers as Singapore dollar hits all-time high against Malaysian ringgit

The remittance service also makes transfers simple and affordable to a range of currencies with relatively short transfer times.

First of all, the platform does not charge administrative fees. Additionally, World First is the most transparent when it comes to their foreign exchange rate margins, which range from 0.5-0.15 per cent.

However, World First does require a minimum transfer of $2,000.

Due to all of its strengths, World First is always worth considering if you need to make medium to large transfers. For our full review on World First, check out this guide here.

Conclusion

If you are looking to take advantage of the favourable exchange rate currently to book your favourite holiday destinations, you’d need a reliable comparison of the hotel booking sites available in Singapore.

Between Online Travel Agencies (OTA) and Aggregators, it might be difficult to find the best hotel deals easily.

This article was first published in ValueChampion.