Over the past several years, travel has been tough. First, we couldn’t travel. Thanks to COVID the world essentially shut down. Once the worst danger had passed, we could travel but only with plenty of precautions. Masks in the airport and on planes, tests before boarding, navigating country-by-country COVID policies, and more tests coming back into the country – travel was possible but not easy. Fast forward to today and many of those requirements have eased, but the cost of travel has skyrocketed. Flights are packed. Delays and cancellations are common.
Well, if you want to travel to Europe, there is one bright spot.
The euro and the U.S. dollar are as close to parity as they have been in 20 years. For Americans traveling to Europe, their money is going further these days.
Both the U.S. and Europe are dealing with inflation and slowing growth. But there are two key differences that are largely driving the Euro lower relative to the U.S. dollar:
- The war in Ukraine has a larger effect on Europe’s economic growth given how much Europe has depended on Russian oil in the past. Many believe a slowdown or recession in Europe will be more significant than in the U.S.
- The U.S. is well ahead of Europe in terms of raising interest rates to tackle inflation. Higher rates in the U.S. make our bonds more attractive, pushing up relative demand and the value of the dollar vs the Euro.
How long might the Euro and Dollar remain at these levels?
The current near parity relationship is likely to continue so long as the difference in interest rates remains. Key policy makers in Europe have signaled a likely start to interest rate hikes in the fall of this year. However, the U.S. has already raised rates by 1.5% and plans to keep going, so Europe has some catching up to do. And they have the same balancing act to perform, raising rates to cool inflation without going too far to trigger a meaningful slowdown, so we shouldn’t expect rates in Europe to go up too quickly.
The bottom line
As our Chief Investment Officer, Bob Weisse, says, “it’s a nice time to travel to Italy”! And if you are starting to plan your trip, don’t forget to check out these other resources that can help you as you get back to traveling:
Are You Getting Paid for the Money You Spend? (tips on earning and using travel rewards)