Editor’s Update:
Today, July 12th, 2022 the exchange rate between the Euro and the US dollar has reached parity – this means the two currencies are exactly equal.
MSN news featured this article and our Chanel classic flap example in their coverage.
If you’re planning a trip to Europe (or thinking about it) and hoping to engage in some luxury shopping, the latest financial news could be helpful. At least if you’re American. We know, it’s hard to believe travel and shopping are in the cards now, as inflation tears through the world economy, the ongoing war in Ukraine and COVID still a risk. So how could this be the right time to head abroad for luxury buying?
Image Credit: CometoParis.com
Well, with all that’s going on in the world, including the jump in the cost of filling up your car or taking out a new mortgage, you could be excused for missing one potentially positive money matter. The U.S. dollar and the Euro are approaching parity.
What that means is that for the first time since 2002, the currencies are nearly at equal value. True parity would mean that $1US = 1€. As of this writing, the exchange is 1€ for $1.05. But at various other times, the euro was worth much more when compared to the American currency. By way of comparison, in 2008 the average exchange rate was that 1€ got you $1.47. As of 2019, the equation shifted to about $1.12 for a euro. Now as the ratio nears 1:1 the value of a US dollar in Europe is really high.
Image Credit: ItalyGenius.com
Of course, as we indicated above, the reasons for the declining euro are serious and distressing. The economy in Europe (or at least many European countries) is struggling, still reeling from the effects of the pandemic, the nearby war in Ukraine, inflation, and more. The U.S. economy has (at least until now) fared better in these later days of the pandemic, though it is facing its own difficulties.
In terms of shopping, for those not tied to the euro, it’s an issue of purchasing power. If your dollar is worth more against the euro, your effective cost will be (or seem) lower.
Take the following example, using Chanel. Why Chanel? Well the brand is known for its price harmonization strategy- making prices equal worldwide. Its last price adjustments put the medium Classic Flap at €7800 and US$8800. At that time (approximately February 2022), the exchange rate between the euro and U.S. dollar was about 1.13 euros to each dollar. When converted, not surprisingly, that equaled $8814. In other words, the same as the U.S. dollar price.
At an exchange rate of 1.05, that €7800 is more like $8100, or a savings of $700. At today’s rate of 1.07, that €7800 is $8300, or a savings of $500. At parity, shoppers will realize a $1000 savings. Of course, in time, Chanel could adjust its European pricing to reflect the decline in the euro’s value. And let’s face it, adjustments generally only go one way – up.
Now if we extrapolate this savings to brands that are already priced much cheaper in Europe like Hermès and Louis Vuitton: the savings are huge!
For the latest 2022 Hermès Prices:
Hermès Kelly Prices Guide 2022
This was a lay person explanation. Now if you really want to geek out and get a deeper understanding, follow along as we have a more detailed take.
Deeper Insights Into the Economics
Last week, the euro traded to a five-year low against the dollar, around $1.05. It is down over 7% against USD in 2022, and almost 15% from twelve months ago. This is all the way down from the peak value it reached versus the dollar in 2008 after the global financial crisis, at $1.58. Investors and analysts are now confident the euro will dip back below $1 in the coming months.
So why is this happening and what does it mean for the market we’re focused on here at PurseBop, the luxury goods market? Books will be written on the many reasons for getting back to parity, but the most important are some combination of the following:
- The strength of the American economy post-Covid relative to Europe: the US government spent trillions of dollars during the pandemic to stabilize the US economy, and in particular labor market, while Europe did the bare minimum. As a result, they’re exiting the pandemic on much weaker economic footing.
- Central bank policy: As a result of unprecedented government spending in the US, inflation is reaching decades level highs, and forcing the Federal Reserve to raise interest rates. Given recession risks in Europe, the ECB is reluctant to raise rates at a similar pace. This makes investing in US debt more attractive, strengthening the dollar
- War in Ukraine: Europe is far more exposed than the US to the tragic events occurring as a result of Russia’s illegitimate invasion of Ukraine, especially on the energy front. A vast majority of Europe’s energy mix comes from Russia. Energy costs are high around the world, but nowhere higher than in Europe right now. This problem could get even more serious if Europe decides to completely ban the import of Russian energy.
Image Credit: Cadogan, Footwearnews.com
All of these contribute to a European economy that’s teetering on the verge of recession and widespread economic slowdown, leading investors to flock to the US for safety. In the process, the euro is getting pulverized.
But this isn’t all doom and gloom, there are some benefits of a weaker currency. For one, exports become more attractive to foreign buyers of goods as they’re now cheaper. It will probably be tough for Europe to overcome global supply chain issues stemming from Covid and rising energy costs in time to dramatically boost export production this year. But maybe this situation puts the European economy on a new footing post-crisis, where it can reestablish its export pipelines and come out stronger than ever.
If Covid stays at bay and Chinese citizens eventually resume travel, European goods markets could see a windfall of revenue from foreign tourists. We’ve discussed at length the importance of foreign buyers for luxury goods companies and we could be setting up for one of the biggest booms yet.
While American tourists don’t contribute as significantly to the bottom line for luxury goods companies, the euro and dollar reaching parity this year could have a significant impact that’s worth keeping an eye on, especially if Americans carry on with their summer travel plans. Between dollar parity and VAT refunds, prices for European luxury goods may approach record lows for US buyers traveling in Europe this year.
Updated: July 18th, 2022
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