In May 2022, the EUR/USD pair hit 1.03515, 2000 pips below January 2021 swing high. Currently, the currency pair is trading at 1.0443. The last time it was at this low was back in January 2017. The US dollar index, which measures the dollar's strength, shows the greenback is highest in over 20 years at 105. The US dollar and euro could reach parity for the first time in two decades.

While the global economic factors used to forecast the currency strength are highly volatile and complex, economists and many forex signals predict the USD rally could continue after a stunted growth during the coronavirus in 2020. 

Why Is the US Dollar Dominating the Euro?

US dollar has been on a strong rally for 12 months, gaining significantly against the euro since the beginning of 2021.

Investment Inflow

With the looming recession and fall in stock prices, investors are seeking refuge in US assets. The greenback has gained around 10% against the euro due to the expectation of aggressive US monetary policy. The federal reserve plans to hike federal funds rates to 2.8% by 2022, the most aggressive in the 21st century. On the other hand, the ECB will be slower on rate hikes to only 25 basis points. Like its peers, the ECB is expected to increase the interest rates, the first increase in a decade, to curb inflation.

The short-term gains due to returns from holding short-term investments on US assets and the high demand for the dollar will see the dollar retains its role as a store of value. A strong dollar curb consumption-related inflationary pressures by decreasing the price of imports. In addition, it increases the price of  US exports. International buyers, therefore, resort to sourcing similar products elsewhere. Essentially, this also helps bring inflation down but at the expense of high unemployment and lower growth. 

While the US will enjoy a reduced cost of goods from Europe, it will be difficult to hold on to the US goods market share.

Ukraine - Russia War 

The invasion of  Russia in Ukraine has dealt a blow to the Euro. The expected increase in energy and food costs is projected to affect the eurozone's economic growth. If the Ukraine-Russia war intensifies, the dollar will continue gaining against the euro. A policy change by the eurozone in reducing natural gas and oil imports will have the same effects. 

The precarious position in Europe puts the greenback in an advantageous position as a haven for commercial interests and international investors.

What It Means for American Travelers in Europe

The closeness to parity means that the price of skyrocketing air tickets will come down. The increasing airfare was caused by increasing oil prices and demand for air travel, resulting in staffing shortages. 

A traveller from the US to Europe incurs up to 50% above the euro rates touring Europe. The exchange rate occasions the additional cost. The reality sinks after the vacation abroad when you look at your bank statement. The bottom line can be significantly affected by even a slight change in the exchange rate. For instance, a hotel night stay costing 200 euros today costs $207. Exactly one year earlier, the exchange rate was 1.19, which means at the same cost, the user could be offset almost $240.

Strength Hinged on Growth Prospects

The recent dollar strength has its foundation in the economic growth prospects and policy stability. The demand for guaranteed high returns on US securities will underpin the strength in the coming days. TIC has recorded rinsing confidence in economic recovery and demand for US financial assets by 139% since Feb 2020. 

After a downtrend in 2021-2022, foreign direct investment growth is rising. If the situation in Europe continues to deteriorate, we can expect the greenback to gain against the euro and move towards parity.