If you haven’t already made travel plans for this year, you might want to consider heading to Europe. The U.S. dollar recently reached parity with the euro, something that hasn’t happened for about two decades. What does this mean? It effectively means that the Eurozone countries are on sale right now for Americans looking for a bargain vacation. Indeed, the strength of the U.S. dollar relative to the weak euro means that Americans will pay about 15 to 20 percent less than usual for their hotels, food, and souvenirs, making that European dream vacation a more attractive option. While the dollar-euro exchange rate fluctuates daily, for the past several years, the cost of a euro ranged from around $1.23 per euro to the $1.13 it cost to buy 1 euro at the beginning of this year. Now, it costs just $1.00 to buy a euro.
So, what explains the rise in the value of the dollar? One factor is the general uncertainty created by the conflict in Ukraine, and especially its potential to negatively affect the European economy. Another factor is the rapid rise in prices that has occurred as the world emerges from pandemic slowdowns and closures. Rising inflation in the United States has already prompted the Federal Reserve to raise interest rates and more hikes are likely. The higher interest rates are attractive to investors looking for safer options for their money. While the European Central Bank is also expected to raise interest rates, those increases are anticipated to be smaller than the moves made by the Federal Reserve. It is likely that these, and other factors, will continue to put downward pressure on the euro, at least in the near term, suggesting that travel costs in Europe will remain low in dollar terms. However, if, despite the strength of the dollar, that trip to Europe is still not in the cards this year, consider buying goods exported from Europe instead. While you might not get to experience the Eiffel Tower in person, capitalizing on the strong dollar by getting a discount on French wine could be a good alternative.
Discussion Questions:
1. Explain the relationship between the U.S. dollar and the euro over the past few years. Has the dollar appreciated or depreciated relative to the euro? What does your response tell you about the dollar’s buying power over this time period?
2. A strong U.S. dollar is a good thing for Americans travelling to Eurozone countries, but what does it mean for U.S. companies that export to Europe? Does a strong dollar make it easier or more difficult for U.S. companies to export to Eurozone countries? Explain your response.
3. Consider the broader implications of a strong dollar. How is a strong currency reflected in a country’s balance of payments? How could it impact policy decisions?
Sources| Washington Post: The Euro and Dollar Are at Parity, Making Europe Travel a Little Cheaper; NY Times: Euro Falls to Equal the U.S. Dollar for the First Time in 20 Years; Unsplash: Euro and U.S Dollar