LONDON: The euro fell on Tuesday, touching parity with the dollar, a threshold not crossed for two decades, weighed down by the prospect of a recession triggered by an energy crisis and an ECB rate hike campaign that lags far behind the Fed.
The dollar index, a measure against six counterparts, was the most weighted with the euro, up 0.3% at 108.45. It had earlier climbed to 108.47, the highest level since October 2002.
The euro has borne the brunt of the dollar’s strength, falling to its weakest level since December 2002 at $1.00005, a level that some analysts have marked as a test of parity.
Neil Jones, head of currency sales at Mizuho Bank, said a large queue of euro buy orders at $1 to hedge cash risk through buy positions or option formations was keeping the euro stable around those levels.
The euro moved closer to the edge after a dire reading from the ZEW Economic Research Institute saw German investor sentiment drop from -28.0 in June to -53.8 points in July.
Nord Stream 1, the largest pipeline carrying Russian gas to Germany, began annual maintenance on Monday, with flows expected to halt for 10 days. But governments and markets are concerned that Russia could extend the shutdown, exacerbate energy shortages and propel the economy into recession.
Analysts said the weakening economy adds to uncertainty over the European Central Bank’s plan to raise interest rates, initially by 25 basis points in July, then 50 bps in September.
“There doesn’t seem to be much support for the euro at this point. It’s not just related to gas prices, but a division within the ECB as to how far they raise rates,” said Sarah Heavin, senior economist at Standard Chartered ,
“The expectation is that (the US Federal Reserve) will do 75 bps this month and aims to get to neutral (rates) as soon as possible, whereas with the ECB, it is a mixed message given the background on gas.”
The move towards parity has given rise to speculation of an ECB intervention but sources in the ECB have told Reuters there is no appetite to intervene. The bank last moved to support a single currency in 2000.
The euro’s weakness has been a big part of the dollar index’s highs, but the US currency is also supported by concerns about growth elsewhere, notably China’s strict zero to contain new outbreaks. COVID policies have been implemented.
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However, the biggest factor driving the dollar’s rise is that the Fed will move rates faster than its peers, reaching the fed funds futures pricing rate of 3.50% by March, rising from 1.58% currently.
US consumer price data due Wednesday is expected to show an 8.8% annualized rate for June.
The dollar however fell to 136.94 yen, down 0.4%, after Monday’s jump to a new 24-year high of 137.75.
Fear of the global economy is driving down commodity prices and in turn commodity-centric currencies. The Australian dollar rose 0.22% to $0.6728, and matched a two-year low of $0.6716 earlier on Monday.
The New Zealand dollar fell flat from a two-year low around $0.6117 ahead of Wednesday’s central bank meeting, prompting interest rates to rise by half a point.
(Additional reporting by Kevin Buckland in Tokyo; Editing by Tomas Janowski)
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