As the dollar runs wild, the euro gets closer and closer to being equal to the dollar.
Europe’s common currency got closer to being worth the same as the US dollar on Tuesday. Concerns about energy and the risk of a recession hurt the outlook for the euro area, while fear of taking risks pushed the greenback higher.
The euro fell as much as 1.3%, reaching a low of $1.0005, which was lower than last week’s low. 2002 was the last time it was this low. So far this week, the Bloomberg Dollar Spot Index has gone up by as much as 1.2%.
Given that it was worth around $1.15 in February, the euro’s fall has been quick and brutal. The dollar has been boosted by a series of interest rate hikes by the Federal Reserve that are getting bigger and bigger. Meanwhile, Russia’s invasion of Ukraine has hurt the outlook for growth in the euro zone and made it more expensive for the region to import energy.
“The thinking on the FX market and across assets is still the same: the Fed is still seen as having more room to raise rates in the future, especially after the strong US jobs report for June,” analysts at Unicredit wrote in a note. “On the other hand, other central banks, like the ECB and the BoE, might have to be more careful because the gas and energy crisis affects their economies more directly.”
Jennifer McKeown, the head of global economics service at Capital Economics, says that the weak euro has shown a major problem for the European Central Bank: it must deal with the risk that raising interest rates will make bond yields in the periphery of the euro zone go up a lot. Because of this, the market is interested in whether or not the central bank can use a new tool to keep peripheral bond spreads narrow, which would let it keep raising interest rates in response to high inflation.
“Most of the time, people would say that a weaker euro is good for exports,” McKeown said. “But right now, people see it more as a bad thing. In terms of imported inflation, it adds to inflation pressure, which is something the ECB really doesn’t want.”
Last week, one of the most popular trades for people who work in foreign exchange was to sell short on the common currency. Scotiabank strategists Shaun Osborne and Juan Manuel Herrera Betancourt wrote in a report on Monday that the euro position changed more than any other major currency last week. Accounts added $769 million to net short bets totaling $2.2 billion, which is the most since late November.
George Saravelos, who is the global head of FX research for Deutsche Bank, told Bloomberg Surveillance that the euro could drop below parity, especially if the Nord Stream 1 pipeline shuts off all of its gas. He said that the bank thinks the euro will move against the dollar in a range from 0.95 to 1.
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Saravelos said, “I wouldn’t say that 0.95 would be too much to ask.” “Even if this gas comes back to full flow after the maintenance period, the risk premium is not likely to go away. I think that’s one of the most important things that’s changed in the last few weeks.”
Tom Fitzpatrick, a Citigroup analyst, said he was “going all-in” on shorting the euro against the dollar, pricing a put on the euro-dollar pair at 0.95.
Still, some strategists were less optimistic about where the dollar and the euro were going in the near future.
Brad Bechtel, a foreign-exchange strategist at Jefferies LLC, said, “It’s hard to argue against owning the USD when the Fed is so aggressive and there are so many problems in Europe.” “On the other hand, EUR/USD seems to be oversold by many technical measures, and parity was a goal for so many people in the market that it wouldn’t be surprising to see a lot of profit taking and a short-term bounce here.”
On Tuesday, the dollar went up against most of the G10 currencies. This caused sterling to drop 0.2 percent to a two-year low, while the South Korean won went up almost 1 percent.