Following the Russian invasion of Ukraine, the demand for Euro has plummeted, but the decline was not the sole consequence for Euro, because of over reliance of Europe on Russian oil and gas as well as foodstuffs (specially grains) from Ukraine, there is a visible inflation throughout Europe particularly on foodstuffs.
However, it is expected that these effects will be further intensified in future. Because the European Union has adopted step-by-step banning of oil products imports from Russia for the coming six months. According to statistics in Eurozone, consumption prices in June showed 8.6% higher than the same period last year. Increase in energy prices up to 42% and inflation of foodstuffs up to 9% are among main factors.
Moreover, high prices of energy can also pave the ground for another stagnation; due to increase of one important input in production, there will be pressure on supply of goods in the EU. The important point to be mentioned is within the past few decades, innovation in supply of goods led to supply rate overtook demand rate and thus created anti – inflation pressure, but at the moment, pressure from energy input price has been mounted. Thus, as Russian invasion of Ukraine continues, it is not unreasonable to expect rising inflation rate as well as further weakening of Euro against US dollar.
Increasing inflation made the European Central Bank inclined towards adoption of an approach coupled with risk, in a way that it decided in its June meeting to step towards increasing interest rate for the months July and September. That’s why an increasing number of policy makers of Governing Council of European Central Bank are now in favor of increasing interest rate at its September meeting.
Nevertheless, in view of its possible damage on Eurozone economic perspective, adoption of such a decision will incur pressure upon European Central Bank particularly on weaker economies of Eurozone. The European Central Bank has not changed its interest rate from (the present) .5% yet, but it is expected to be slightly increased. Therefore, it is not inconceivable that there is a possible recession in Eurozone, and if it happens, the U.S. will be affected too.
But from the other hand, the US Federal Reserve Bank had demonstrated a risky approach in implementing a contraction monetary policy, impressed the parity rate between Euro and US dollar to a larger extend in comparison with the European Central Bank. Many experts believe that the US Federal Reserve Bank has become the main impetus for declining trend of Euro value, and the European Central Bank has lost its initiative.
After the inflation rate rose in the US, the Federal Reserve Bank stopped purchasing bonds and instead, took step to increase the interest rate. In a way that in March 2022 Meeting of Open Market Committee, the interest rate was increased up to .25%. The further steps taken by Federal Reserve Bank were .50% and .75% coupled with risk to control inflation and to create a stronger position for the US dollar.
In such a situation, during 2022, the US dollar index which assesses the dollar value in a basket of other currencies, shows more than 13% increase. In fact, the Russian invasion of Ukraine has led to creation of a safe status for US dollar.
In general, if the parity index of Euro versus dollar is analyzed on the basis of a fundamental approach, then in view of the difference between a crucial approach of the Federal Reserve Banks in comparison with dubious approach of the European Central Bank on the increase of the interest rate, then there is a stronger possibility of more pressure for further reduction of Euro value against US dollar. Inflation trend in the US is the essential factor for changing or continuing the present situation. In other words, if the inflation rate reduces in the US, the Federal Reserve Bank will most probably reduce the interest rate which may also impress the fluctuation trend of Euro versus US dollar.