European consumers are suffering, but exports are pulling. Experts say the dollar will strengthen whenever the world is in turmoil.
Hanna Visala,
Maarit Piri-Lahti
4.5. 18:50 • Updated 4.5. 19:29
The dollar has strengthened rapidly against the euro over the past month.
In the good old days, one euro earned 1.30 US dollars. Now the euro received only $ 1.05 (May 3). The exchange rate is the weakest for the euro for more than five years.
We summarized four key points about the strengthening of the dollar and its consequences.
1. The consumer suffers, but exports pull
The main rule is that when the euro depreciates, exports start to pull. They benefit those who trade outside the eurozone, especially the United States. In this case, for example, Finnish products become cheaper for Americans and trade well.
On imports, the effect is the opposite. Products from the United States are becoming more expensive.
– Simplified, exports are pulling, but the European consumer is suffering, Etla’s CEO Aki Kangasharju says.
When one euro makes less dollars, all U.S. products are more expensive for eurozone businesses and residents.
– Tourists also notice the rise of the dollar in their wallets if they travel to the United States, says a senior market analyst at the Bank of Finland Jukka Lähdemäki.
2. Raw material prices are rising
An increase in the value of the dollar is not a mere advantage for exports.
If an exporting company has costs that it has to pay in dollars, it is reflected in the price of the product. In particular, raw materials are most often priced in dollars.
– All goods priced in dollars are more expensive. When raw materials become more expensive, it raises manufacturing costs and thus directly affects the final price of the product, Kangasharju concludes.
The strengthening of the dollar is particularly evident in the price of oil. Oil is already expensive because of Russia’s war of aggression, and the strengthening of the dollar will make it even more expensive for Europeans.
– With the price of oil in dollars per barrel, now more euros are needed for every dollar, Kangasharju says.
One of the facts is also that the United States has recovered from the pandemic faster than Europe, and the war is widening the gap even further.
– In Europe, Germany and Italy are particularly dependent on gas, which is priced in dollars on the market. Italy is already an economically weak country and Italy’s difficulties are causing problems elsewhere in the eurozone as well, says Etlan Kangasharju.
3. The Finnish steel industry is one of the winners
The price of steel and oil will rise in the wake of the dollar. In Finland, the steel and oil industries will benefit because world market prices are high.
The beneficiaries are, for example, Neste, which refines oil and sells it on. The steel industry will also benefit from high steel and iron prices. The biggest profits come from Finnish companies operating in the United States.
– Competitiveness of companies with large exports outside the euro area will improve. In the US market in particular, a cheap euro is an advantage, says market analyst Jukka Lähdemäki.
4. The dollar strengthens whenever the world is in turmoil
The strengthening of the dollar is no surprise to analysts. There is talk of a so-called safe haven, meaning that the dollar tends to strengthen whenever it goes weak globally.
– It is perfectly expected and in line with the theory that this will be the case. Now there are many other things, Kangasharju says.
The strong dollar is based on the US economic situation and interest rates. Both have advocated strengthening the dollar. The economic outlook in the United States is better than in Europe, especially after Russia invaded Ukraine.
Another reason for the rise in the dollar is market expectations of a faster pace of interest rate hikes by the US Federal Reserve than the ECB. The growing interest rate differential between the euro area and the United States supports the strengthening of the dollar.
– This year, the US Federal Reserve is expected to raise its key interest rate to close to 3%, while in the euro area market expectations of rate hikes will be much more moderate. Although the increases are only forecasts, their assumption is reflected in exchange rates, the Bank of Finland’s Lähdemäki states.
Parity is also not ruled out by economists.
– The war has created significant uncertainty in the European economy, which weighs on the value of the euro. In the current situation, forecasting is very challenging, Lähdemäki says.