The euro has tumbled near parity to the US dollar
This article mentions the interest rates issue but glosses over it.<p>Imagine two currencies ABC and DEF. They are at parity (ie 1 ABC = 1 DEF). ABC&#x27;s central bank has 10% interest rates. DEF&#x27;s central bank has 1% interest rates. What happens? ABC strengthens against DEF just based on the interst rate differential.<p>Why? Imagine if it didn&#x27;t. You could borrow DEF 1B, convert to ABC, earn 10% interest and then pay it back later. If the exchange rate remains fixed, that would be a risk-free return of 9%. Because of that it doesn&#x27;t happen. Think about it. This creates demand for ABC.<p>Because of skyrocketing inflation, the Fed has raised interest rates. Europe has not [1] and really can&#x27;t.<p>Secondly, in uncertain times, there is nearly always a flight to the safety in financial markets, which usually means US Treasury bonds. This too creates demand for US dollars.<p>So there are issues with th eEuro but really what you&#x27;re seeing is a strong US dollar. This is a temporary situation.<p>I&#x27;m not saying the energy issues in Europe aren&#x27;t significant. They are. We can hope this creates pressure for a peaceful resolution to the war in Ukraine. This idea seems to make a lot of people angry like it means capitulating to Russia. Every conflict ends diplomatically (including WW2). Russia too is facing pressure to find a win and end the war as it&#x27;s not sustainable long term so we&#x27;re really in a game of chicken. Putin may be hoping a European winter (where the effects of an energy shortage will be more pronounced) will sway the odds in his favor.<p>[1]: <a href="https:&#x2F;&#x2F;www.euribor-rates.eu&#x2F;en&#x2F;euribor-charts&#x2F;" rel="nofollow">https:&#x2F;&#x2F;www.euribor-rates.eu&#x2F;en&#x2F;euribor-charts&#x2F;</a>