Euro-Dollar Parity Again?

November 30, 2015 1:45 PM

The euro is again heading towards parity with the dollar—after 13 years. The currency ended last week at 1.059 to the dollar. That's up from a 2015 low of $1.0458 in March. The euro was last at dollar parity in December 2002, having peaked at $1.60 in July 2008.

In my book Inside the Euro Crisis: An Eyewitness Account I predicted euro-dollar parity by end 2015, because of the European Central Bank's massive bond-buying program started last year. This may just happen: The Federal Reserve is expected to start raising interest rates in December, while the European Central Bank (ECB) is likely to expand its quantitative easing program. This means monetary policy in Europe and the United States are heading in opposite directions. The ECB's anticipated move is likely to weaken the euro, while the Fed could give the dollar a boost.

ECB president Mario Draghi signaled last week the bank would consider lengthening its bond-buying program farther into 2016.1 And if the ECB runs out of euro area government bonds to buy, it may decide to buy mortgage or corporate bonds in euro area countries. This too, may weaken the euro.

The recent terrorist attacks in Paris may have a short-term negative effect on the euro too, through the expected reduction in travel and tourism across Europe. Examples abound: Italy is installing metal detectors at the Coliseum after Italian historic monuments were identified as terror targets; the Brussels city center, airport, and metro were closed last week for security concerns; and the Copenhagen airport had to shut one of its terminals for a day.

Should the euro reach parity with the dollar, the European economy will get a welcome boost. Low energy prices and the ECB's expansive policy have helped Europe return to a growth path: Real GDP is expected to rise from 1.9 percent this year to 2.0 percent in 2016 and 2.1 percent in 2017. Greece is the only European economy still in recession.2 Still, the euro's continued depreciation could add 0.3 percentage points to overall European growth in 2016–17. If that happens, Europe's rate of economic growth will catch up to that of the United States for the first time since 2008.

Notes

1. "Dollar and euro diverge thanks to Draghi effect," Financial Times, November 27, 2015.

2."Autumn 2015 Forecast: Moderate recovery despite challenges," news release, European Commission, November 5, 2015.