The euro fell on Tuesday almost touching parity with the dollar, a threshold not crossed for 20 years, weighed down by the likelihood of recession triggered by an energy crunch and an ECB rate rise campaign that lags far behind that of the Fed.
The euro has borne the brunt of dollar strength EUR=EBS, falling as low as USD 1.00005, the weakest since December 2002, a level some analysts flagged as parity being tested. By 1020 GMT it was changing hands at USD 1.00170, down 0.2 percent.
This phenomenon will further intensify the cost-of-living crisis in the eurozone, and speculation of intervention by the European Central Bank is being made, but the ECB have said that they have no appetite to intervene.
Nord Stream 1, the biggest pipeline carrying Russian gas to Germany, was down for maintenance since Monday (July 11), with flows expected to stop for 10 days. Governments and markets are worried Russia might extend the shutdown, exacerbating the energy crunch and tipping the economy into recession.
Euro weakness has been a big part of the dollar index’s push higher, but the U.S. currency is also supported by worries about growth elsewhere, with China in particular implementing strict zero-COVID policies to contain fresh outbreaks.
An ECB paper published in 2020 cited models estimating that a 1 percent depreciation of the euro against a basket of currencies could add as much as 0.11 percentage points to inflation within a year — and 0.25 percentage points over three years.
The last time the euro was worth less than the dollar was in 2002, when euro cash was in its infancy and shared by only 12 member states.
The single currency has lost more than 10 percent of its value against the greenback since the start of the year amid fears that a sharp economic slowdown in the eurozone will leave the European Central Bank’s interest rates far below those of the Federal Reserve.
At the same time, the dollar is benefiting from safe-haven flows, with investors rushing into U.S. government bonds as a hedge against economic and political uncertainty.
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