The euro's spectacular fall

Everything you need to know, in four paragraphs

(Image credit: (Hannelore Foerster/Getty Images))

Planning a trip to Europe this summer? "If so, congratulations: The world's financial markets have smiled upon you," said Jordan Weissmann at Slate. "The euro is in the midst of a spectacular free fall" — down more than 12 percent against the dollar since the start of January. Last year, a euro was worth as much as $1.39; this week, it was trading around $1.05, a 12-year low. Some financial experts project the shared currency will continue to slide, hitting parity with the dollar by the end of the year, before going as low as 85 cents by 2017. "For American tourists, buying a glass of wine in Paris is becoming cheaper by the day."

Interpreting changes in currency markets is notoriously difficult, said Matt O'Brien at The Washington Post. The reason for the euro's tumble, though, is clear. "To boost Europe's extraordinarily weak economy," the European Central Bank has for months been printing money and buying heaps of bonds, just as the Federal Reserve did during several rounds of quantitative easing following the 2008 financial crisis. That's led interest rates to fall across Europe — sometimes into negative territory — all while short-term interest rates in the U.S. have steadily crept northward, thanks to the improving U.S. economy. Big investors, especially those in Europe, have responded by moving their money out of euros and into dollars. "Think about it like this. Would you rather buy a German 10-year bond that pays 0.25 percent or a U.S. 10-year bond that pays 2.1 percent?" And "voilà," that's exactly how the euro falls 24 percent against the dollar in less than a year.

From a European standpoint, a tumbling euro "certainly sounds like a bad thing," said Mike Bird at Business Insider. But it's actually "fantastic news for Europe's recovery." That's because a weaker currency makes European exports, which account for more than a quarter of the continent's GDP, much cheaper for overseas buyers, which in turn boosts eurozone economic growth. "French and Italian cars, German machine tools, and Irish drugs" have all become dramatically more affordable in the last few months. You can be certain that's music to the ears of long-struggling CEOs across the continent. The weaker euro is "the bloc's best hope for growth right now."

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On the flip side, the dollar is stronger than it's been in years, said Paul Krugman at The New York Times, and that's "bad for America." Sure, a strong dollar translates into cheaper imports, which can be a blessing for U.S. consumers. But it also makes it harder for U.S. manufacturers to sell their goods overseas. And if corporations respond to these headwinds by cutting back on hiring, the fragile economic recovery could quickly hit the skids. That's why the Federal Reserve needs to be extra careful about raising interest rates, said Danielle Kurtzleben at Vox. "Raising rates could make the dollar even stronger, and that could both be a further drag on inflation and weigh on growth." A cheaper European vacation certainly sounds nice. But not quite as nice as a real and lasting U.S. recovery.

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