The euro falls below dollar parity for the first time since 2002

The euro falls below dollar parity for the first time since 2002

The euro fell below parity against the dollar today for the first time in almost two decades, as a tightening US Federal Reserve and growing concerns over rising risks of a recession in the euro zone continued to beat the currency.

The latest slide in prices came after another hot US inflation data set.

The European single currency started this year on a strong note amid an economic recovery from the pandemic.

But Russia’s invasion of Ukraine, soaring European gas prices and fears Moscow could cut supplies further have raised the specter of a recession and hurt the euro.

Meanwhile, heightened global uncertainty and an aggressive Fed monetary policy stance have benefited the safe-haven dollar.

The euro fell as much as 0.4% to a midday low of $0.9998, its lowest since December 2002.

It was last on the day down 0.1% to $1.005 and is down more than 10% so far this year.

“Gas rationing, stagflation, an expected recession, these are all good reasons to be negative on the euro,” said Stuart Cole, senior macroeconomist at Equiti Capital in London, before the euro crossed that threshold.

He added that these factors would make it harder for the European Central Bank to raise interest rates, further widening the interest rate differential with the United States.

Since becoming freely available in 1999, the single currency has spent very little time below par.

In fact, that was the last time between 1999 and 2002, when it fell to a record low of $0.82 in October 2000.

Within its relatively short two-decade-long history, the euro is the second most-demanded currency in the world’s foreign exchange reserves, and the daily euro/dollar turnover is the highest among currencies on the global $6.6 trillion-per-day Market.

The slide in the euro is causing headaches for the ECB.

Allowing the currency to fall will only fuel record-high inflation, which the ECB is struggling to stem.

But trying to shore it up with higher interest rates could exacerbate recession risks.

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The ECB has so far downplayed the issue, arguing that even if currency matters, it has no exchange rate target. Even on a trade-weighted basis – against the currencies of its trading partners – the euro is down only 3.6% this year.

The euro fell yesterday as the war in Ukraine sparked an energy crisis that hurt the continent’s growth prospects.

It fell as low as $1.00005 on the most widely used trading platform Electronic Broking Services and touched $1 in Reuters trading overnight.

Ronan Costello, Head of FX Strategy at Bank of Ireland, said that the euro very briefly reached parity with the dollar, “it was just a matter of seconds and then it went higher again, but it’s still getting a lot traded close to parity and will likely trade that down there again for the foreseeable future”.

He explained that the euro has had very little to offer over the last 12 months and that there has been a very strong move in the dollar.

“If you look at the currencies that have performed well this year, it’s for a number of possible reasons. Some because they have benefited from higher commodity prices, so improving their trading conditions has attracted capital into their currencies,” Mr Costello said.

“Other currencies are seen as safe havens in times of conflict and finally there are high-yielding currencies or currencies that have attracted capital because of higher rates on deposits or deposits and the problem for the euro is that it has not benefited from any of those factors in the last 12 months, so it has been significantly outperformed by the US, which is not only a safe haven currency, but also a currency that offers a much higher deposit rate than the euro.”

Economists are forecasting that US headline inflation accelerated to 8.8% yoy in June, a 40-year high, which should boost expectations of rate hikes and help the dollar.

The euro fell below parity against the Swiss franc last month and is flirting with a slide below its 200-day moving average against the pound.

Weakness in the euro and yen has propelled the US dollar index higher, which hit a two-decade high of 108.560 this week and hovered at 108.18 in Asian trading today.

The Japanese yen has taken a hit this year as the Bank of Japan remains ultra-loose monetary policy in contrast to tightening almost everywhere else.

It was under pressure today at 137.05 per dollar after hitting its lowest level since 1998 at 137.75 on Monday.

The Australian dollar held steady at $0.6767, just above a two-year low of $0.6712 set yesterday.

Sterling has also slipped on the back of a stronger dollar, and analysts are seeing it drifting following the resignation of British Prime Minister Boris Johnson last week. Eight Conservatives are vying to succeed Johnson.

“The combination of slow growth, debt and high inflation is likely to prove very difficult for the new Tory leadership,” said Jane Foley, senior strategist at Rabobank. “Sterling could suffer from a lack of new direction until the new Prime Minister is in place.”

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