For months the dollar has increased its value against other currencies, which means that it takes more euro, more yen, more pounds to buy a dollar: for some time it has even reached parity with the euro, for the first time in twenty years. This is the consequence of the very aggressive fight of the American central bank against inflation, but also of the fact that in times of crisis the dollar is considered a safe haven, that is, a security to have in case things go wrong from an economic point of view. .
It is a normal trend and perfectly in line with the traditional dynamics of the economy. When we talk about the effects of certain currency trends, however, it must be taken into account that there are always two perspectives: if an effect is positive for one, it will be negative for the other; if those who buy in euros lose, those who sell in dollars gain, and vice versa.
First, what is the dollar moving relative to other currencies? Much of the recent increase reflects differences in monetary policy. The Federal Reserve, the American central bank, is proving to be rather aggressive in combating inflation, that is, the generalized increase in the level of prices. It has already raised interest rates five times since the beginning of the year. The last three were substantial and each amounted to 0.75 percent.
Raising interest rates means trying to “cool” the economy, because in general fewer loans are taken to buy things and therefore the system slows down and prices fall. But it also means that financial investments in the United States become more profitable on average, because investing there guarantees higher interest rates. American securities are bought in dollars, and it is in this passage that the inflow of foreign capital increases their value.
The dollar is also seen as a safe haven asset in difficult and uncertain times, on a par with gold. Investors, frightened by the aftermath of the war in Ukraine and fears of an oncoming recession, tend to stock up on dollars, aware that it is the safest currency in the world because an economy like that of states is largely unlikely. United may fail.
There is also a new component between these normal market dynamics and it concerns high energy prices. Oil and gas are mainly bought in dollars and the fact that there have been significant increases has helped to exchange many more than in the past.
The dollar has appreciated against all currencies and can be seen from the trend of the US dollar index, an index that measures its value in relation to a set of foreign currencies, which have a different weight in the calculation depending on the relevance international economy they represent. Among these is the euro, which accounts for almost 60 percent of the total of this group of currencies, followed by the yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc.
The comparison with the euro, which is the currency of the economic area most comparable to the United States, is very important. Since July, the two currencies have fluctuated around a substantial parity, after twenty years in which the euro has always been the stronger of the two. Which means that, net of daily fluctuations, it takes one euro to get one dollar. At the beginning of the year, one euro was worth around 1.15 dollars and even 1.6 in 2008.
The substantial parity between the two currencies depends above all on the difference with which the European Central Bank and the American Federal Reserve have set up their fight against inflation. The Fed was quite aggressive and was one of the first to raise interest rates. The ECB, on the other hand, delayed a bit, also because until a few months ago the origins of inflation were very different between the European Union and the United States. But then she finally made up her mind and announced the biggest interest rate hike in its history.
The perspective can also be reversed: a strong dollar corresponds to a weak euro. In addition to the differences in monetary policy, the European Union is in fact suffering from a more marked economic weakness at the moment, mainly due to the energy crisis to which it is struggling to find a common response.
A weak euro brings with it a whole series of consequences. The first is positive: European exports will be considered cheaper by those who buy in dollars or with stronger currencies. This is because the exchange rate is more favorable, it takes fewer dollars to buy euros than in the past.
This contributes to making European companies, and therefore also Italian ones, more competitive. The United States is the third destination market for Italian exports, which were worth $ 61 billion in 2021. The sectors that exported the most, and which could therefore further benefit from a more attractive change, were those of mechanics, fashion, components and agri-food.
The drawback is that, in the face of relatively cheaper exports, dollar imports by euro buyers are now more expensive than before. It takes more euros to buy dollar goods. From the United States, Italy mainly imports technological, pharmaceutical, mining and machinery goods.
The strengthening of the dollar also affected energy purchases. Oil is bought only in dollars and the stronger the dollar, the more euros it will take to buy a barrel of oil. In the past, fluctuations in the price of crude oil were cushioned by a favorable exchange rate. For example, when in 2008 the price per barrel had reached 144 dollars, with the favorable exchange rate for the euro, the final price in Europe was only 97 euros. Today the increases are no longer cushioned by a strong euro and have a direct impact.
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Added to this is the fact that, to compensate for the lower supplies of Russian gas, Italy, for example, has foreseen greater imports of liquefied gas from the United States, therefore also in this case it has paid in dollars.
The same considerations made for imports and exports apply to tourism. Travel and shopping in the United States will be less convenient but, conversely, visiting and shopping in Italy will be more convenient for American tourists. And this, given the strong recovery in tourist flows and the support they guarantee to various sectors of the economy, can represent an advantage.