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warning flags for the eurozone following the dollar’s parity with the euro

Following the euro's sharp depreciation, which analysts warn will have significant effects on European commerce, the euro and the U.S. dollar have mostly traded at parity this week.

Following the euro’s sharp depreciation, which analysts warn will have significant effects on European commerce, the euro and the U.S. dollar have mostly traded at parity this week.

For the first time since December 2002, the value of the euro fell below that of the dollar on Wednesday. The two currencies have since traded in a narrow band, matching one another’s fluctuations.

At the close of trading on Thursday in Europe, one euro was worth 1.0023 dollars. Since the start of this year, the value of the euro relative to the dollar has decreased by almost 12%. The value of one euro peaked in 2008 at about 1.6 dollars.

Professor of public economics at the University of Pavia in Italy Riccardo Puglisi said, “This is a tough issue because it helps and harms at the same time.” It benefits European exporters by lowering the price of their goods in other currencies. However, it implies that import prices will increase.

According to Puglisi, if the two currencies stay in sync, there may be benefits for trade efficiency since exporters and importers won’t have to concentrate on discounting one of the currencies in trade calculations.

However, there is also a chance, in the opinion of some analysts, that the euro’s decline is a sign that the continent’s economic growth would slow down.

What is the euro’s decline saying? This week, the Institute of International Finance’s top economist, Robin Brooks, stated on Twitter. “Even though financial conditions have tightened, it’s becoming more and more obvious that the eurozone is entering a recession.”

The crisis between Russia and Ukraine, which is having a much greater impact on European economies than on nations further away, is one factor in this. The 19-nation eurozone’s GDP prediction for this year was lowered by the International Monetary Fund to 2.8% in April from the 3.9 percent expected before the Ukraine conflict started.

Another cost is inflation. June saw the biggest annual price growth in the eurozone since records have been kept, at 8.6%. High inflation lessens the significance of economic progress by diminishing the purchasing power of a currency, which is pushed by the rising gasoline prices brought on by the crisis in the Ukraine.

The eurozone countries are being impacted the hardest by the rising pricing pressure, according to Javier Noriega, an economist with the Milan-based investment bank Hildebrandt & Ferrar. Even if economies expand, most individuals will end up with more money in their pockets, but that money will only purchase so much more.

Following the recent events, stock markets across Europe fell, with the Standard & Poor’s Europe 350 Measure, an index of blue-chip European stocks, down 1% on Thursday, the index’s third value decline in this week’s four trading days.

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