The euro dipped below the dollar for the first time in two decades…
On July 13, the euro decreased by 0.4% to a value of $0.9998 versus the dollar. This marked its lowest parity level since December 2002.
Equiti Capital’s Chief macroeconomist Stuart Cole said this was due to energy rationing and stagflation. He told Reuters that growing recession fears also played a role.
And the situation may only worsen…
With ongoing geopolitical tensions – and the U.S. Federal Reserve’s aggressive policies – the European Central Bank may also pursue interest-rate hikes.
But this might not have the effect the ECB wants. Even if it does bump up interest rates, the fact that it has dragged its feet compared with the U.S. means it will struggle to catch up.
And if the parity between the currency widens further, it could send the euro lower and European inflation higher – boosting the dollar and potentially hurting the U.S.’s overseas’ revenues.
This is particularly true for stocks held by the S&P 500. Nearly 50% of the index’s companies rely on sales from Europe and other parts of the world.
If the dollar continues to strengthen against the euro, these tech-heavy businesses would see lower revenues and weaker margins.
Still, it’s not all bad news. On the flip side of it all, companies such as Walmart (WMT) tend to benefit in this type of environment.
It’s already a powerhouse that generates roughly $570 billion in net sales per year, giving it plenty of cash to weather economic downturns.
However, it’s also a massive importer. In 2020, Walmart imported roughly 930,000 shipping containers of merchandise – as most of its products come from parts of the world that offer lower costs and higher margins.
So, despite volatile consumer spending within the U.S., the dollar’s strength and the euro’s weakness mean the retailer’s broader costs can remain low… even with surging inflation.
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