The Euro Will Survive Falling Below Parity With the Dollar

The euro hasn’t been this cheap against the dollar for almost two decades, but it can get cheaper still. The tail risk of Russian gas and oil being suddenly shut off, most likely plunging the European continent into a sharp recession, is too unpredictable for investors to confidently bet on a rebound any time soon.

The good news, though, is that this time really is different. When the euro traded at less than one dollar at the start of the century, it was largely down to an existential risk that the new common currency project could easily fall apart. Then, the euro crisis 10 years later highlighted fundamental differences between the core and peripheral countries stressing the union. But now the euro area is jointly facing an external threat, and while imported inflation on this scale hurts, it’s a collective problem. The eventual resolution will be too.

According to Kit Juckes, currency strategist at Societe Generale SA, the common currency is undervalued on pretty much every metric. For instance, he points to the International Monetary Fund's purchasing power parity measure, which estimates fair value at $1.45 per euro, a long way from the current market rate of about $1.04. And, to channel John Maynard Keynes, currencies can irrationally stay rich or cheap for extended periods beyond most investors' solvency.