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The euro has hit its highest level since February 2022 against the dollar. This makes traveling to the US cheaper. German holidaymakers can also benefit from favorable exchange rates in other countries.
The euro strengthened again, with the common European currency gaining more than two percent in a week. It hit $1.1243, the highest level since February 2022. This was an astonishing rise, as the euro even fell below dollar parity at one point; in the fall, the lowest price for the euro was just $0.9538.
Consumers benefit from the strength of the euro once they leave the euro zone and go on vacation outside the euro zone. Therefore, recent events in the foreign exchange market are good news for tourists traveling to the United States. Vacations to the US are about 8% cheaper this year than in summer 2022 — just by looking at the exchange rate.
How U.S. inflation has anything to do with the euro
But where does this “resurrection” of the euro come from? Experts believe that the strength of the euro is mainly due to the weakness of the dollar. Therefore, the reason for the euro’s rise is mainly in the United States.
There have been growing signs recently that underlying inflationary pressures are easing. In June, consumer prices rose by only 0.2% month-on-month. Core inflation (ie, excluding energy and food), which is important to the trend, also rose just 0.2%, below its level since February 2021.
Wider spreads favor euro
Markets then shrugged off concerns about interest rates, and speculation spread that rates were about to peak or even cut rates this year by the Federal Reserve. The days of US interest rate hikes appear to be numbered.
Not so in the euro zone: the European Central Bank (ECB) is lagging behind in the fight against inflation, with ECB President Christine Lagarde already announcing plans to raise interest rates at her next meeting in July. This has further widened the interest rate differential between the euro zone and the dollar zone. As a result, investments in the Eurozone become more attractive, thereby strengthening the euro on the foreign exchange market.
Holidays in Poland just got more expensive
Does this mean holidays are getting cheaper everywhere because of the stronger euro? never. For example, the euro has not performed as well against some of its neighbors as it has against the U.S. dollar. The euro has lost about 2 percent of its value against the Swiss franc over the past year. The exchange rate against the Polish zloty even fell by almost 8% in a year.
The weak situation that the zloty had to deal with after the Russian invasion of Ukraine has proven unsustainable. Foreign investment in Poland has boomed in recent months, and German companies such as Bosch and Mercedes-Benz have also stepped up investment in Poland. This keeps demand for the zloty high.
Is the pound cheap again soon?
The euro has also underperformed against DKK and GBP, and most importantly, EUR/USD hasn’t changed much since summer 2022. Meanwhile, EUR/GBP’s massive gains were erased again recently. That’s because expectations for a rate hike from the Bank of England have soared in recent weeks.
However, some foreign exchange experts believe that these expectations are overstated. They pointed to the rather hesitant BoE statement and growing fears of a hard landing for the UK economy. This should limit the pound’s appreciation potential, explained Commerzbank FX analyst You-Na Park-Heger.
Cheaper holidays in Sweden and Norway
But besides the United States, there must be other countries whose national currencies have depreciated against the euro. EUR/NOK has gained almost 10% since the summer of 2022. Compared with the Swedish krona, the increase is even as high as 12 percent.
However, eurozone holidaymakers hoping to benefit from better exchange rates should probably hurry up: the Norwegian krone, for example, has recently appreciated significantly against the euro. The backdrop is high price data combined with economic data showing the economy remains reasonably strong despite past rate hikes – adding to the pressure on Norges Bank. “Markets accept Norges Bank’s restrictive attitude,” explained Commerzbank FX analyst Antje Praefcke. This should help the NOK in the near future.
What to consider in the case of Türkiye
At first glance, holidays in Turkey have become particularly cheap, as the euro has appreciated almost 70% against the Turkish lira in a year. Yet Turkey’s inflation rate is the highest it’s been in more than two decades — notably. High inflation makes hotels and restaurants more expensive. The example of Turkey clearly shows that, in addition to exchange rates, holidaymakers should also keep an eye on inflation.