The euro has hit parity with the United States dollar and stock markets fell as the prospect of further central bank tightening and worries about the health of economies worldwide unnerved investors.
By 10:00 GMT on Tuesday, the euro was at a low of $1, its weakest in more than 20 years.
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The US dollar’s role as the go-to currency for investors worried about the economic outlook has been boosted in recent weeks, with the US currency roaring to two-decade highs against multiple currencies.
The euro has been particularly vulnerable given the effect of a continuing spike in natural gas prices on the regional economy and the war in Ukraine. Meanwhile, the European Central Bank has been behind rivals in raising interest rates.
Mizuho analysts said the move towards parity was happening as “recession in the eurozone is priced in”, and said the backdrop suggested little to improve risk sentiment.
SG Futures said this is a “catastrophe” for the European Union as energy imports run the risk of becoming more pricey.
“Energy supply is already unaffordable and as we head into winter it’ll likely get even worse,” it added on a tweet.
— @ATXponential (@atxponential) July 12, 2022
The biggest single pipeline carrying Russian gas to Germany, the Nord Stream 1, began annual maintenance on Monday, with flows expected to stop for 10 days.
With tensions between Europe and Russia at their highest in decades over the war in Ukraine, officials are concerned that gas supplies may not be resumed on July 21 once the scheduled maintenance work is complete – exacerbating Europe’s energy supply crunch and potentially speeding a recession.
Euro weakness has been a big part of the dollar index’s push higher, with the safe-haven US currency also supported by worries about growth elsewhere, as China, in particular, implements strict zero-COVID policies to contain fresh outbreaks.
But arguably the biggest factor in the dollar’s rise is the view the Federal Reserve will hike rates faster and further than peers.
The focus for this week will be macro data including US consumer inflation on Wednesday, and comments from Federal Reserve officials as investors look for clues on the outcome of its upcoming policy meeting before the pre-meet blackout period, when trading activity is curtailed.
A high inflation reading would add pressure for the Fed to step up its already aggressive pace of interest rate increases.