For currency markets, the new week began with the dollar hitting a new 20-year high, while the euro remains in retreat after trading below parity with the US currency for most of last week.

Market analysts expect that there will even be some fluctuations in the opposite direction, that this trend will continue in the near future, which will affect the direction of capital flows, as well as the prices of raw materials on international markets, and in particular - of energy carriers.    

The exchange rate of a given currency can also be a "sentence" for the economic prospects, and in this respect the scales are not tilted in favor of Europe, BTA cites.

There are two sides to the story: on one side is the weak euro, on the other - the strong dollar. 

The European currency reached its highest value of $1.18 shortly after its introduction on January 1, 1999, but then declined steadily, falling to the $1 mark in February 2000.

The euro hit an all-time low of 82.30 cents in October 2000 before rising above parity again in 2002 as a large US trade deficit and Wall Street accounting scandals put pressure on the dollar.

Behind the trend observed recently, there are two reasons: the difference in interest rates on both sides of the Atlantic and the war in Ukraine, the German "Tagesspiegel" points out. 

The US Federal Reserve Board has already raised its key interest rates several times, reaching a range of 2.25-2.5 percent.

On Friday, at the conference in Jackson Hole, Wyoming, US central banker Jerome Powell was adamant that the regulator intends to continue to pursue an aggressive monetary policy.

The Fed is likely to bet on more big interest rate hikes in the coming months as it focuses on taming the country's inflation, which has hit a 40-year high, he said. 

Powell acknowledged that continued credit tightening will cause hardship for many households and businesses as higher interest rates further slow the economy and potentially lead to job losses.

"That's the unpleasant price of reducing inflation," Powell said, then added that "failure to restore price stability would mean a much bigger problem." 

To some extent, it can be said that Washington can afford such a position - the US economy so far seems to be able to achieve a significant "softer landing" after the shocks recently, as evidenced by a stable labor market and growing consumer confidence.

As UFR rates rise, rates on interest-bearing investments also tend to rise.

Higher returns draw investors' money from euro to dollar-denominated investments.

These investors will have to sell euros and buy dollars to invest in the desired assets, pushing the euro down and the dollar up. 

"The money will go where there is a higher yield," said Karsten Brzeski, chief economist for Germany and Austria at ING Bank (ING), quoted by Deutsche Welle.  

However, the ECB cannot reciprocate – the Frankfurt institution has only raised its interest rate once – by 0.5 percentage points, to zero after eight years of negative rates.

He is expected to announce another raise in September. 

However, this direction of monetary policy in the euro area may be halted by the gathering clouds over the European economy - expectations of a quick recovery from COVID-19 have been replaced by forecasts of a recession, mainly due to high energy prices and record inflation. 

Europe's dependence on Russian energy supplies has proven to be a huge economic and geostrategic weakness since the outbreak of the conflict in Ukraine, which has been going on for six months now and shows no signs of ending anytime soon. 

Energy prices pushed euro zone inflation to a record 8.9 percent in July, making everything from groceries to utility bills more expensive.

The situation is also compounded by concerns that governments will have to introduce a natural gas regime for energy-intensive sectors such as steel, glass and agriculture if Russia further cuts or shuts off gas taps altogether. 

This week, Gazprom will completely stop supplies for three days through the Nord Stream 1 gas pipeline, which is already operating at severely reduced capacity, and the big question will be whether they will resume as planned after September 2. 

Natural gas prices at European gas hub TTF in the Netherlands jumped to record highs amid dwindling supplies, fears of further outages and strong demand.

At the end of last week, the spot price of gas in Europe crossed $3,500 per 1,000 cubic meters for the first time since March and approached the then-record high of $3,900.

In recent days, contracts have eased slightly, but continue to flirt with the threshold of $3,000 per 1,000 cubic meters, which deals a new blow to the European industry.

This applies with particular force to Germany, which for more than a decade has been the main engine of the European economy, and the main sectors of its industry could not really function without Russian gas. 

Now the expensive dollar is dealing another blow to European industry, making imports of essential goods and services, including oil, even more expensive.

This effect was painfully felt already in the first half of the year - if the price of oil increased by 21 percent, calculated in dollars, then in euros the price increase was as much as 38 percent. 

"Because of the weak euro, the already expensive energy will become even more expensive," says financial experts Thomas Altman from QC Partners. 

In search of security 

The U.S. dollar is still the world's dominant currency, where international trade is conducted and much of central bank reserves are held.

It benefits from its status as a safe haven for investors in times of uncertainty.

At the moment, a strong push is also being observed for another currency, enjoying the fame of a safe investment - the Swiss franc, which since the beginning of the year has appreciated by nearly 8 percent compared to the euro, notes the German "Tagesspiegel".

For a long time, the Swiss central bank with targeted interventions supported an exchange rate of 1.08 francs to one euro, but according to bankers in Zurich, there are no longer grounds for this and, fearing "importation" of inflation, they aimed for policy changes even before ECB.

Last night, the ECB reference rate against the Swiss franc was also below parity - 1 euro was quoted at 0.9670 Swiss francs.

franc. 

Analysts of foreign exchange markets and investment strategists predict that the weakness of the euro will persist and it will be permanently quoted below 1 dollar. 

"Whether it is because of the upcoming energy crisis and the correspondingly increasing danger of recession, but the euro rate will probably remain below parity for quite some time. At the same time, there is also a possibility that the euro will sink even more against the dollar," warns Jürgen Molnar, capital markets strategist in "RoboMarkets" (RoboMarkets).

American banks such as "Morgan Stanley" (Morgan Stanley) predict that the euro will remain at the level of 0.99 dollars until the end of the year.

The expectations of the German Commerzbank are similar, and according to strategists of the Japanese Nomura International, the euro may even fall to $0.95. 

Who wins and who loses?  

And here things are two-sided and mutually bound.

The US and the EU are major trading partners, so the exchange rate change will be felt on both sides.

American tourists to Europe will find cheaper hotel and restaurant bills and entrance tickets, while for Europeans visiting the United States or other countries where the dollar dominates will become more of a financial challenge.

In the US, a stronger dollar means lower prices for imported goods, from cars and computers to toys and medical equipment, which can actually help tame inflation.

At the same time, it makes US-made products more expensive in overseas markets, widening the trade deficit and giving foreign products a price advantage in the domestic market. 

American companies with large businesses in Europe will have to watch their earnings from those businesses shrink when and if they decide to bring those profits back to the US.

If the euro profits stay in Europe to cover the costs of the Old Continent's operations, the exchange rate becomes less of an issue.

The weaker euro poses an almost unsolvable dilemma for the European Central Bank, because it means higher prices for imported goods, especially oil, which is priced in dollars.

The ECB is already being pulled in different directions: on the one hand to raise interest rates as a traditional "cure" for inflation, but higher rates carry the risk of slowing economic growth, which no one can afford at the moment.

At the same time, the weaker position of the single European currency can make European exports more price-competitive in the US and make US production more expensive for European customers, thus giving an indirect boost to European producers.