For a few moments, the exchange rate between the Euro and the U.S. dollar was at price parity, meaning the two currencies were worth the same amount. And while that's good news for Americans traveling to Europe this summer, it's not so good for companies doing business overseas. Greg McBride, Chief Financial Analyst at Bankrate.com, explains what parity is and what it means for travelers, businesses, and the overall economy.

Opening Bell

Euro Briefly Reaches Parity With U.S. Dollar

here to explain is Greg Mcbride, chief financial analyst at Bankrate dot com. Greg, let's break this down and really if we can dig into why this is happening now, why are we seeing parody essentially the U. S. Dollar almost equivalent and at one point yesterday equivalent to the euro, but the dollar has really strengthened and not just against the euro but against a basket of currencies from around the world. A lot of this has to do with the fact that the Federal Reserve and the U. S. Economy are little just a little bit further down the pathway that that has been actively and aggressively raising interest rates they got an earlier start than a lot of other of the major central banks. The european central bank has yet to do. So Japan certainly not in any kind of hurry to to raise their rates. And so you've seen significant strengthening of the dollar against both the euro and the yen. To the point where you alluded to that parody a pace place we have not been at and probably more than 20 years. That was around 2000 last time we dollar in the Euro heritage. All right, so let's break this down for the consumer because this, I think if you're an american consumer is a bit of a bright spot for you, especially you have travel plans to go to europe, which by the way, I do in about a week or so. So I'm loving this at the moment. How does this help the american traveler who's going to your europe, take advantage of the exchange rate, Well your timing is perfect Alicia if your dollar is going to go further, once you're on the ground over there now that being said the strength of the dollar relative to the euro. Yes it does make your buying power go a little bit further but inflation is an issue on both sides of the atlantic. It does not make europe a cheap destination, You're not gonna confuse it with Mexico or Thailand or brazil by any means, europe is still expensive. It's just your dollar goes a little bit further. And so that hotel room uh you know isn't gonna take as big a bite once it's translated back into dollars when you get that credit card statement after you get home. Yeah and if you're buying goods over there and bring them back, you also get the benefit of that back. Tax free fund which is a nice kind of added benefit on top of that discount if you would say you know the euro and the dollar right now let's talk about the other hand of this because if you are a U. S. Company and you are taking currency in europe, which a lot of companies do to benefit from then the euro being stronger historically than the dollar. This is not a great time for you. Break that down for us, you said it, I mean this is the flip side of that coin of the travelers, us travelers going overseas and seeing their dollars go a lot further and and and it translates into fewer dollars spent back here at home. Well, for businesses, U. S. Multinationals that sell things overseas, it translates into fewer dollars back here at home. And so we're gonna hear a lot about this on corporate earnings calls over the course of the next month or so, what a headwind uh multinationals are facing as a result of the strengthening dollar, not just in the euro area but in other parts of the world. Yeah, if you're an mne right now, multinational enterprise, the worry is pretty noticeable and if you look at a lot of these companies, I think of Microsoft is one of the big names that people have talked about, that is kind of pulled back on this. Are there any particular companies even beyond the Microsoft that analysts are looking at in terms of their exposure here with that exchange rate differential? Well, there are, I think a lot of other variables to consider here. I mentioned inflation being an issue on both sides of the atlantic, you've got the oil prices, uh they hold on, pull back a little bit in recent weeks, but still significantly higher than a quarter or even a year ago. Uh And so when you look at transport companies, you know, that's gonna factor in as well, so, you know, it isn't just as simple as pointing to the exchange rate because of the fact that you've got so many of these other significant variables also a play, not to mention just economic growth. I mean, we're talking about the US economy slowing, uh, the european economy is, is in a much more precarious position from the standpoint of flirting with recession. So, you know, there's, you've got those significant headwinds working against you as well as strengthening dollar if you're a US multinational. Yeah, I've heard the analogy over the last week being the best house on a bad block, so to speak, the US in the situation where we're experiencing, you know, similar inflationary pressure is certainly a bit of a pool back, some saying we're already in a recession, but you look around the rest of the world in particular, europe and they're in a worse off situation in terms of what businesses can do to, to combat the negative that they may have to deal with when it comes to kind of parity here. What are the options? I don't know that you can switch some of your contracts and say, hey, by the way, we're gonna not accept the euro and accept the dollar, but can you utilize inflation perhaps as a way to kind of offset that differential to an extent. Yes, and I think what you also see among the bigger multinationals is more and more currency hedging just to take away the unpredictability aspect as it pertains to future quarter is gonna be too late to do that now as it pertains to second quarter results. But going down the road, I think that you're gonna see more and more companies taking that step just to take the unpredictability out of the equation. Keeping in mind of course that what investors really don't like our negative surprises, some currency hedging could remove the potential for negative surprise for those companies that are worried about the impact on stock. And this is where the cfos out there really earn their money in terms of kind of hedging on currency and let's pull back all of this in totality. What is the broader economic impact of now the euro and the dollar coming to parody? And if I can layer on this question with a second one, when have we seen an inversion? The dollar was stronger and what we're like the economic conditions um you know surrounding that is made bit of a bellwether. If we see an inversion, what we can expect. Well that was, you know, a very short lived, I mean of course the euro hasn't been around all that long coming out of, you know, late nineties, around 2000 and so there was a brief period where the dollar was stronger but then pretty much since then it's been uh the euro has been the stronger currency and now back to this parody, really reflection of these these current conditions where the U. S. Economy stronger than the european economy inflation and issue on both sides of the atlantic But the U. S. Central bank much further down the pathway of raising interest rates. That brings dollar flows into U. S. Markets which boosts the dollar. That's the dynamic we've got in play. If we look downstream here at the point where inflation eases whenever that might be uh then the Federal Reserve, you know, when they start to ease off at that point, you might see some of these other foreign central banks, european central bank, maybe even Japan getting started or more aggressive in the rate raising game. And so at that point you start to give back some of these recent gains that we've seen. But again that's still well down the road and there's a lot of I think ifs and buts between here and there between, you know, certainly with the articulated inflation, I think you kind of touched on this day but I want to ask it, you know, how how long do you think we're gonna be in this kind of close to parity or at parity position? And what kind of sparks the turnaround where the euro potentially gets stronger again? Well, I mean, I'm not a currency forecaster, but I will say that you know what sparks the turnaround is that dynamic where the Fed reaches the destination of where they're going to stop raising interest rates, where they're a little more comfortable with where inflation is. But some of those other central banks are just kicking into higher gear that process of raising interest rates and chasing down inflation timing of that of course, very uncertain because it all hinges on inflation as we saw again this morning yet another head fake on inflation just, you know, we don't really know where it peaks when it peaks or much less when it starts to receive. Yeah, the read this morning certainly pushes the timeline for the Fed a little bit further. And when I say a little bit further, we don't even know what that little bit further actually means. Greg. Such great insight. Always appreciate your insight and your time, Greg Mcbride, chief financial analyst at Bankrate dot com.