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Europe is on sale. Why the dollar-euro exchange rate is a win for Americans

The dollar and the euro are flirting with "parity" for the first time in two decades.
A $100-dollar bill is seen on top of Euro bills in Bogota, on July 12, 2022. - The euro struck parity with the dollar for the first time in nearly 20 years on Tuesday as a cut in Russian gas supplies to Europe heightened fears of a recession in the eurozone. (Photo by DANIEL MUNOZ / AFP) (Photo by DANIEL MUNOZ/AFP via Getty Images)

If you still haven't planned a summer vacation, you might want to do it fast. Europe is looking pretty cheap right now.

For the first time in 20 years, the dollar and the euro are worth about the same. They have been flirting what currency traders call "parity."

That means U.S. travelers won't pay a premium for a hotel room in Barcelona, tickets to the Paris Opera, or a full-course dinner in Rome.

That makes Teresa Valerio Parrot happy. She and her husband are celebrating their 25th wedding anniversary this year.

They thought about taking a trip to California or Hawaii, from their home in Colorado. Flights are expensive everywhere, but thanks to the strength of the dollar, Europe started looking mighty attractive.

"We quickly realized it was going to be about the same price to go to Paris than it was to stay within the United States," Valerio Parrot says.

So, in September, they're headed to France.

"We plan to go, have some great wine, hopefully sip some bubbles, and bring back a whole bunch of souvenirs," she says.

The last time they were there, in 2013, one euro was worth about $1.30.

Why dollar is king now

At a time when the entire world is dealing with high inflation, worries about a global recession and markets rocked by immense volatility, the dollar has become an island of safety.

The dollar has climbed in value against global currencies by more than 10% since the beginning of the year.

It means that people need to put up fewer dollars in exchange for other currencies. At the beginning of the year, for instance, it would take $1.13 to buy one euro, compared to just $1 now.

It may seem counterintuitive that the dollar is strengthening at a time when there is so much fear about the future of the U.S. economy.

Last month, inflation was up a whopping 9.1% from a year ago, with prices rising at their fastest annual pace in more than four decades. To fight high inflation, the Federal Reserve has been hiking interest rates aggressively, and that has fueled fears the Fed's policies could lead to a recession.

However, they are also helping to boost the value of the dollar.

"Higher interest rates generally lead to a stronger currency," says Jane Foley, the head of foreign exchange at Rabobank. "That's textbook economics."

That's because investors start chasing dollar-denominated investments that will lead to higher returns, compared to assets in other currencies.

The Federal Reserve isn't the only central bank trying to tame inflation by adjusting interest rates, but so far, it has done more than others have. The European Central Bank plans to raise interest rates at its next meeting later this month.

The dollar is also the world's dominant currency

Another reason is that the dollar plays a unique role in the global economy.

"The dollar has fundamentals all of its own," says Foley. "Generally, a currency will react to the fundamentals of the country to which it belongs. That isn't necessarily the case with the U.S. dollar."

It continues to be the dominant reserve currency. Countries around the world keep a lot of dollars on hand, because they see it as a safe asset.

What is driving the weakness of the euro?

Countries in the eurozone are also dealing with high inflation, and there are fears a recession may be imminent.

However, the chief concern in Europe is energy prices.

After Russia invaded Ukraine, the U.S. and its allies imposed a broad array of sanctions and restrictions on Russian oil and natural gas. That's driven up prices, and Europeans have been hit especially hard.

Although gasoline prices have fallen some from record highs, and oil has been trading below $100 a barrel again, there are fears the situation in Europe could deteriorate further. Much of it stems from the fact that Russia is the largest supplier of oil and gas to European countries.

This week, the Nord Stream 1 gas pipeline, which carries natural gas from Russia to Germany, was taken offline for scheduled maintenance.

That work is supposed to take 10 days to complete, but there is speculation Gazprom may not restore the flow of natural gas, or the Russian gas giant may reduce its output.

If European countries aren't able to build up their reserves in the summertime, they may have to ration gas in the winter, and that could lead to a broader slowdown.

Factories would have to scale back production, which could lead to layoffs, and the odds of a recession would get even higher.

Copyright 2022 NPR. To see more, visit https://www.npr.org.