The euro has hit parity with the dollar, falling to its lowest level in 20 years and even skirting just below a one-to-one exchange rate with the U.S. currency at times this week.

It’s a psychological barrier in the markets. But psychology is important, and the euro’s slide underlines the foreboding in the 19 European countries using the currency as they struggle with an energy crisis caused by Russia’s war in Ukraine.

Here’s why the euro’s slide is happening and what impact it could have:

WHAT DOES EURO AND DOLLAR PARITY MEAN?

It means the European and American currencies are worth the same amount.

A currency’s exchange rate can be a verdict on economic prospects, and Europe’s have been fading. Expectations that the economy would see a rebound after turning the corner from the COVID-19 pandemic are being replaced by recession predictions.

More than anything, higher energy prices and record inflation are to blame. Europe is far more dependent on Russian oil and natural gas than the U.S. to keep industry humming and generate electricity. Fears that the war in Ukraine will lead to a loss of Russian oil on global markets have pushed oil prices higher. And Russia has been cutting back natural gas supplies to the European Union, which EU leaders described as retaliation for sanctions and weapons deliveries to Ukraine.

Energy prices have driven euro-area inflation to a record 8.6% in June, making everything from groceries to utility bills more expensive. They also have raised fears about governments rationing natural gas to industries like steel, glassmaking and agriculture if Russia further reduces or shuts off the gas taps completely.

The sense of doom increased when the major Nord Stream 1 pipeline from Russia to Germany closed Monday for scheduled maintenance, raising fears the Kremlin won’t restart deliveries this month.

“What’s the fall in the Euro saying? It’s becoming increasingly clear that the Euro zone is heading into recession,” Robin Brooks, chief economist at the Institute of International Finance banking trade group, tweeted Tuesday.

WHEN WAS THE LAST TIME THE EURO WAS EQUAL TO THE DOLLAR?

The euro hasn’t been valued below $1 since July 15, 2002. While constantly changing, it has dropped just under a $1 at times this week.

The European currency hit its all-time high of $1.18 shortly after its launch on Jan. 1, 1999, but then began a long slide, falling through the $1 mark in February 2000 and hitting a record low of 82.30 cents in October 2000. It rose above parity in 2002 as large trade deficits and accounting scandals on Wall Street weighed on the dollar.

Then as now, what appears to be a euro story is also in many ways a dollar story. That’s because the U.S. dollar is still the world’s dominant currency for trade and central bank reserves. And the dollar has been hitting 20-year highs against the currencies of its major trading partners, not just the euro.

The dollar is also benefiting from its status as a safe haven for investors in times of uncertainty.

WHY IS THE EURO FALLING?

Many analysts attribute the euro’s slide to expectations for rapid interest rate increases by the U.S. Federal Reserve to combat 40-year highs in inflation, which hit an annual 9.1% on Wednesday.

As the Fed raises interest rates, the rates on interest-bearing investments tend to rise as well. If the Fed raises rates more than the European Central Bank, higher interest returns will attract investor money from euros into dollar-denominated investments. Those investors will have to sell euros and buy dollars to buy those holdings. That drives the euro down and the dollar up.

The ECB has announced it will raise interest rates next week and add another increase in September. But if the economy sinks into recession, that could halt the ECB’s series of rate increases. Meanwhile, the U.S. economy looks more robust, meaning the Fed could go on tightening — and widen the rate gap.

WHO WINS?

American tourists in Europe will find cheaper hotel and restaurant bills and admission tickets. The weaker euro could make European export goods more competitive on price in the United States. The U.S. and the EU are major trade partners, so the exchange rate shift will get noticed.

In the U.S., a stronger dollar means lower prices on imported goods — from cars and computers to toys and medical equipment — which could help moderate inflation.

“The parity makes it easy for us, and a lot more money goes a lot further now, so we can do a lot more on our trip,” said John Muldoon, who was visiting Rome this week from Delaware.

Olivia Navarret, another Rome tourist from Pennsylvania, said the exchange rate meant a shirt she bought was less expensive.

“It’s cheaper to come here and buy stuff,” she said. “So it’s better to come here, I guess, and spend money here than spend money in the U.S.”

WHO LOSES?

American companies that do a lot of business in Europe will see the revenue from those businesses shrink when and if they bring those earnings back to the U.S. If euro earnings remain in Europe to cover costs there, the exchange rate becomes less of an issue.

A key worry for the U.S. is that a stronger dollar makes U.S.-made products more expensive in overseas markets, widening the trade deficit and reducing economic output, while giving foreign products a price edge in the United States.

A weaker euro can be a headache for the European Central Bank because it can mean higher prices for imported goods, particularly oil, which is priced in dollars. The ECB is already being pulled in different directions: It is set to raise interest rates, the typical medicine for inflation, but higher rates also can slow economic growth.

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WASHINGTON (AP) — The U.S. dollar has been surging so much that it’s nearly equal in value to the euro for the first time in 20 years. That trend, though, threatens to hurt American companies because their goods become more expensive for foreign buyers. If U.S. exports were to weaken as a result, so, too, would the already-slowing U.S. economy.

Yet there’s a positive side for Americans, too: A stronger buck provides modest relief from runaway inflation because the vast array of goods that are imported to the U.S. — from cars and computers to toys and medical equipment — become less expensive. A strengthened dollar also delivers bargains to American tourists sightseeing in Europe, from Amsterdam to Athens.

The U.S. Dollar Index, which measures the value of American money against six major foreign currencies, has jumped nearly 12% this year to a two-decade high. The euro is now worth just under $1.02.

The dollar is climbing mainly because the Federal Reserve is raising interest rates more aggressively than central banks in other countries are in its effort to cool the hottest U.S. inflation in four decades. The Fed’s rate hikes cause yields on U.S. Treasurys to rise, which attracts investors seeking richer yields than they can get elsewhere in the world. This increased demand for dollar-denominated securities, in turn, boosts the dollar’s value.

Also contributing to the currency’s appeal, notes Rubeela Farooqi of High Frequency Economics, is that despite concern about a potential recession in the United States, “the U.S. economy is on firmer footing compared to Europe.”

Not since July 15, 2002, has the euro been valued at less than one dollar. On that day, the euro blew past parity with the dollar as huge U.S. trade deficits and accounting scandals on Wall Street pulled down the U.S. currency.

This year, the euro has sagged largely because of growing fears that the 19 countries that use the currency will sink into recession. The war in Ukraine has magnified oil and gas prices and punished European consumers and businesses.

In particular, Russia’s recent reduction in natural gas supplies has sent prices skyrocketing and raised fears of a total cutoff that could force governments to ration energy to industry to spare homes, schools and hospitals. (European leaders have denounced Moscow’s move as an effort to blackmail Europe for backing Ukraine and embracing Western sanctions in the aftermath of Russia’s invasion.)

Economists at Berenberg bank have calculated that at current rates of consumption the added gas bill would be 220 billion euros ($224 billion) over 12 months, or a whopping 1.5% of annual economic output.

“This war is a ‘body-blow’ to Europe,” Robin Brooks, chief economist at the institute of International Finance banking trade group, tweeted this week. “It undercuts Germany’s growth model that’s based on cheap Russian energy. Europe is facing a seismic shift, and (the) euro needs to fall to reflect that.’’

A European slowdown could eventually give the European Central Bank less leeway to raise rates and moderate economic growth to address its own inflation problem. The ECB has announced that it will raise its key interest rate by a quarter-point when it meets later this month and possibly by up to a half point in September. A weaker euro feeds inflationary pressures by making imports to Europe more expensive.

Analysts at UniCredit said global recession fears were a prime driver in foreign exchange markets “amid the general view that the Fed might ultimately have more opportunity than many other central banks” to raise rates. The analysts also noted the dollar’s role as a globally recognized safe haven, in light of recent financial market turmoil, as another factor that’s boosting demand for the buck.

In the meantime, the dollar’s rise is complicating an already uncertain outlook for the United States, the world’s biggest economy. On the one hand, the stronger greenback makes foreign goods less expensive for Americans and eases inflationary pressures. But not by much.

Mark Zandi, chief economist at Moody’s Analytics calculates that a 10% rise in the dollar over the past year, against the currencies of its trading partners, reduced inflation by about 0.4 percentage point. Though Zandi calls that a “meaningful” impact, he notes that consumer prices have soared 8.6% over the past year, the biggest year-over-year gain since 1981.

And a sturdier currency takes a toll on U.S. companies that do business overseas. For one thing, it erodes the profits of multinational companies that rely on overseas sales. The stronger dollar makes their foreign revenue worth less when they convert it to dollars and bring it home the United States. Microsoft, for example, last month downgraded the outlook for its April-June earnings “due to unfavorable foreign exchange rate movement.”

Worse, a stronger dollar makes U.S.-made products more expensive in overseas markets, while giving foreign products a price edge in the United States.

“The stronger dollar,” Zandi said, “weighs on (economic) growth as it results in reduced exports, more imports and thus a wider trade deficit.”

Indeed, a growing trade gap subtracted 3.2 percentage points from U.S. economic growth in the January-March period. That was the main reason why the nation’s gross domestic product — the broadest gauge of economic output — shrank at a 1.6% annual rate in the first quarter.

Economists say the risk of recession is already rising in the United States as the Fed raises borrowing costs and consumers deplete the savings they built up during the pandemic.

“The strength of the dollar,” said Eswar Prasad, an economist at Cornell University and the Brookings Institution, “will certainly do no favors for U.S. exporters.’’

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