This is issue #099 of our weekly newsletter. Sign up now and never miss the finance, investing & economics news people living abroad need to know.
The EUR and USD briefly hit parity
Last week it happened: for the first time since 2002, 1 US dollar bought exactly 1 euro (and vice versa).
If you’ll recall, we dedicated last week’s issue to the topic, as the two exchange rates were within striking distance of parity at the time.
If you missed it or our follow-up explainer piece, you can find them on our blog here and here.
By Thursday, the two finally touched, and, shortly after that, the dollar became (slightly stronger) than the euro.
Here are our takeaways.
Currency traders created the soft landing.
Parity probably would’ve happened sooner if it wasn’t for the fact that currency traders slowed the rate down.
While most of us only interact with the exchange rate right when we trade money, traders and finance professionals have a longer-term relationship with it.
Traders will use different market orders to help them automatically take a profit or stop a loss when the exchange rate hits a certain level. (They utilize the same tools for stocks and other investment instruments, too).
When the exchange rate hits that level, the trader’s instructions will go directly to the market, (hopefully) making them some money in the process.
As the EUR and USD started to become equal, currency traders tried to support the euro as many wanted to exchange at parity.
This support kept the EUR and USD from touching immediately, and it was only by the end of the week that the two currencies traded places with each other.
The EUR came back a bit, and maybe that’s for the best.
As of this writing (Monday afternoon in Europe), the EUR gained some ground, helping the two to get further away from parity. Right now, analysts are chalking up the moves to stock markets in the US, doing marginally better than last week.
In any case, many economists will welcome a stronger EUR as it benefits the European economy. While we’re big exporters here, many of our raw materials — including energy — trade in USD.
A weaker euro creates price and energy inflation. Considering the precarious situation of the European economy, seeing the euro gain strength is welcome news.
Volatility isn’t going to end any time soon.
Regardless of how rare it was for the exchange rates to touch or even the dollar being stronger, there’s one thing for sure: volatility isn’t going anywhere.
Between the seemingly-confused economy, likely interest rate hikes, and Russia’s war of aggression, we can expect more sharp ups and downs in the EUR, USD, and other currencies for the foreseeable future.
ECB Rate hike announcement
The European Central Bank’s governing committee will meet this week with a likely interest hike at the forefront of the agenda. Like their American and British counterparts, the consumers in the eurozone are also under inflation pressures. Raising the interest rate should help to cool the economy down, which, in theory, will help tame price increases.
If the ECB does raise rates (as widely predicted), it will be the first time in over a decade they’ve done so. Since 2011, when they last pushed up rates, the European economy has been through a lot.
During this time, many countries in the bloc went through austerity measures, culminating in Greece threatening to leave the common currency. The resulting impact of austerity and structural weaknesses that carried over from national currencies forced the ECB to eventually cut rates below 0.0%, where they remain today.
If the ECB does increase the rate by 0.5%, we’ll be back at a 0% baseline in the eurozone. The impacts of doing so will ripple across the economy, impacting everything from savings accounts, borrowing costs, and exchange rates. Keep your eye out Thursday to see which way they go.
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Azerbaijan Gas Deal
As we were writing this issue, news broke that the European Union reached an agreement with Caspian petrostate Azerbaijan to increase gas flows between the two.
Our biggest security and economic risk in Europe right now is our over-reliance on Russian gas with no alternative to fill the gap. (Either in energy sources or suppliers.)
The EU, led by President Van der Leyen, just secured a deal with Azerbaijan to more than double output to the bloc.
The gas will pass (sorry, not sorry) through the Southern Gas Corridor, which goes from Azerbaijan, through Georgia and Turkey, before entering the EU in Greece, with an onward connection in southern Italy via Albania.
The markets reacted with relief to this news. Prices per megawatt-hour (MWh) for Dutch TTF (the European gas benchmark) dropped from a high of 182 EUR per MWh to 156 EUR as of this writing.
This development is welcoming news. However, there are still significant concerns about supply shortfalls. Anything we can do right now to save gas will help us avert a catastrophe this winter. (Again, please feel free to join our Instagram campaign!).
Celsius Goes Bust
Last week, the crypto lending platform Celsius filed for bankruptcy protection in the US. If you’re not familiar with crypto lending (and, to be fair, most in the industry don’t even get it), here’s how it works.
Instead of letting crypto holders’ (investors) deposits sit idling in wallets (accounts), platforms like Celcius will lend those assets to other investors for collateral or platforms for staking.
Staking is the process of putting up cryptocurrency to help validate blockchains that use “proof of stake.”
While there’s not enough space to cover it here (check out our blog post for more info), a blockchain is a transaction ledger for crypto transactions. There are different ways a blockchain can validate itself, and allegedly staking is one of the most efficient methods.
Here, holders of the underlying currency will put up (aka stake) part of their holdings to help validate a transaction. In exchange for each successful validation, the holder receives a new coin or part of a coin as a reward.
Platforms like Celcius enable holders to put their coins to work on staking platforms which would pay them interest in the form of new coins. These platforms — including Celsius — boast “risk-free returns” in the double digits.
If this sounds too theoretical or too good to be true, you’re probably on to something. Celsius got caught out in the recent crypto crash and had excess liabilities of 1.1 billion USD by the time the dust settled. Now, the platform is painfully working through the clean-up process with investors left empty-handed.
The lesson here? Nothing is risk-free other than the deposit rate guaranteed by central banks (even then, you’re still losing to inflation). In crypto land, that risk-free rate of 18% indicates that the currency is inflating at least by that amount. Buyer beware.
