The euro came into circulation in 2002 after decades of discussion and planning to bring unity, prosperity, and stability to Europe. After two world wars in the first half of the 20th century, proponents argued that common institutions would reduce the risk of war and crisis and provide diplomatic arenas for conflict resolution. The euro was an important symbol of this unity.
In July 2022, the euro fell to $0.9998 against the dollar, its lowest level since December 2002, as the euro zone's energy crisis and economic woes continue to crush the single currency.
Meanwhile, the U.S. dollar index rose to its highest level since October 2002 before falling from that level.
Even more remarkable than the euro breaking this level is how quickly it has fallen against the dollar. The currency used by 19 European countries has fallen more than 11 percent this year due to the dollar's strength. The euro falling below this level indicates a growing fear of a recession in the euro area.
Why the Euro price dropped?
The war in Ukraine and the pandemic have affected the global economy. Prices for key commodities, including oil and natural gas, have risen sharply, pushing food and energy prices worldwide. This resulted in the highest inflation rates in decades. Efforts to Wean Europe off Russian energy are proving difficult, while Chinese production has been restricted due to Covid-19 regulations.
The United States and European central banks have committed to lowering inflation by raising interest rates even as the outlook for the global economy worsens. The decline also appears to have been caused by the ECB lagging behind the Fed in tightening monetary policy despite rising inflation and fears of a recession. This has strengthened the dollar but has not helped the euro much.
In July, uncertainty over the future of Europe's energy supply and growing fears that Russia would permanently shut down a critical gas pipeline to Germany sent the euro to its lowest level in 20 years. However, analysts have been predicting this scenario for several months, including JPMorgan Chase and HSBC. A weaker currency will add to inflationary pressure in the European Union by making imports more expensive.
What does it mean for crypto?
The euro's fall to $1 for the first time in 20 years piqued the interest of some crypto traders. The exchange rate could affect the valuation of cryptocurrencies and stablecoins pegged to a single European currency.
Euro stocks are falling more than US indices in the face of an outflow of capital from euro assets. And as one might expect, euro-based stablecoins have fallen harder than their dollar-based counterparts.
Despite this, the euro-pegged stablecoin market is valued at $440 million. This represents less than 0.29% of the USD-pegged stablecoin market value of $151 billion. The cryptocurrency market generally has a market capitalization of $950 billion.
Since euro-backed stablecoins make up such a small part of the overall market, the weakness of the euro is unlikely to impact the overall market capitalization significantly.
Furthermore, the foreign exchange market is a zero-sum game. So if the euro is expected to lose ground against the dollar, it also means that the dollar is expected to rise. While a decline in the EUR/USD could reduce demand for euro-pegged stablecoins, it could stimulate demand for dollar-pegged stablecoins.