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Companies confronted by the euro's fall against the dollar

Published July 11, 2022 - 3 mins reading time
SMALL BUSINESSES Companies European Central Bank

On July 5, the euro fell to its lowest level since 2002 against the dollar, dropping below the $1.01 threshold. This near-parity of the two currencies is creating new difficulties for businesses, particularly small ones. Zoom in on the consequences of the euro's depreciation.

The euro's fall against the dollar: multiple causes

Already facing numerous difficulties, companies are now having to cope with the euro's fall against the dollar. On July 5, the two currencies were almost at par: the euro fell below $1.01, its lowest level in 20 years.

There are several reasons for the euro's fall, starting with the divergent monetary policies of the European Central Bank (ECB) and the U.S. Federal Reserve (Fed). While the Fed has raised interest rates, the ECB is still applying negative rates, which means that the euro is earning less than the dollar.

Another factor behind the euro's depreciation is the war in Ukraine, and its impact on soaring oil, gas and electricity prices.

For some companies, such as those in the luxury goods sector who export manufactured goods, or those who export dollar-denominated services, the euro's weakness is an advantage.

But for the majority of companies, the euro's fall against the dollar will have an impact on imports, particularly imports of electronic components and raw materials.

Difficulties for businesses and the risk of inflation

However, the consequences of the euro's depreciation should not be measurable for at least 6 months, as invoices currently payable have been hedged against currency risk for 6 to 18 months.

Large companies have various instruments at their disposal to protect themselves against currency risk, but this is generally not the case for small and medium-sized businesses, which also have less scope to pass on cost increases to their sales prices.

However, if the situation persists, there is a real risk of rising inflation, as companies will have no choice but to increase their selling prices in order to survive. According to Allianz Group economic research, if the euro remains at such a low level against the dollar, an additional 0.8 points of inflation could be recorded after one year.