Bad Value

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What's going on?

The euro fell to its lowest level against the US dollar in two decades on Tuesday.

What does this mean?

The US Federal Reserve (the Fed) and the European Central Bank (the ECB) have taken two very different approaches to inflation in the last few months. The Feds opted to raise rates by 1.5% this year, and markets are pricing in another 0.75% later this month. The ECB, meanwhile, is taking a softly-softly approach: the central bank hasnt even started hiking rates, and a string of weak economic data has traders betting that itll raise them just 1.4% this year when it eventually does.

This divergence has had a knock-on effect on the countries respective currencies, as the prospect of higher interest rates in the US makes the greenback more attractive to international savers and investors. Ipso facto: the euro has dropped to its weakest level versus the US dollar since 2002, and Bloomberg analysis suggests theres now a 60% chance that theyll reach parity by the end of the year (tweet this).

Why should I care?

The bigger picture: Keep an eye out.
This dynamic will probably get a mention when US companies report their quarterly earnings over the next few weeks. On the one hand, it makes European imports cheaper, reducing the firms costs on that front. But it also makes US companies exports more expensive for their European customers, which means they risk losing business to cheaper rivals. Whats more, any US firms with a big European presence think Coca-Cola and Ford will have found those sales worth less once they were converted back into dollars.

For you personally: How about a road trip instead?
This news might alter your vacation plans too. If youre an American with aspirations of traveling Europe, nows the time: youll get a lot more for every dollar you spend over there. But if youre a European who wants to visit the glittering bastion of democracy in person, itll cost you.

Originally posted as part of the Finimize daily email.

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