The list of problems plaguing the euro zone economy is clear: the highest inflation rate on record, energy insecurity and growing talk of a recession. This month, another threat emerged. A weaker euro boosted expectations that it could be on par with the U.S. dollar.
Europe is facing “a steady stream of bad news,” said Valentin Marinov, a currency strategist at Crédit Agricole. “The euro is the pressure valve for all these worries, all these fears.”
The currency used by 19 countries has not fallen to or below a one-to-one exchange rate with the US dollar in 20 years.At that time, in the early 2000s, the low exchange rate undermining confidence in the new currency, launched in 1999 to help the region achieve unity, prosperity and stability. By the end of 2000, the ECB intervention Support the fledgling euro in the currency market.
Today, there are fewer questions about the euro’s resilience, even as the euro is near its lowest level against the dollar in more than five years.Conversely, the currency’s weakness reflects The EU’s economic outlook is bleak.
Since Russia invaded Ukraine in late February, the euro has fallen more than 6% against the dollar as trade channels are disrupted and inflation is fed into the continent through high energy, commodity and food prices as governments try to cut Russian energy supplies.
While a weaker euro is a boon for U.S. vacationers heading to the continent this summer, it will only add to the region’s inflationary woes by raising the cost of imports and eroding the value of earnings for U.S. companies in Europe.
Many analysts have determined that parity is only a matter of time.
According to analysts at HSBC, one of Europe’s largest banks, a euro will be worth a dollar by the end of this year and will fall even lower early next year. “We find it difficult to see a single silver lining at this stage,” they wrote in a note to clients in early May.
Traders are watching to see if EUR/USD will break below $1.034, a low hit in January 2017. On May 13, the euro fell close to $1.035 against the dollar.
Below that level, the prospect of euro parity becomes “pretty important,” analysts at Dutch bank ING said. Analysts at Japan’s Nomura Bank forecast parity in the next two months.
For the euro, “the path of least resistance is lower,” JPMorgan analysts wrote in a note to clients. They expect the currency to reach parity in the third quarter.
Economists at Pantheon Macroeconomics said last month that an embargo on Russian gas would push the euro flat against the dollar, with other analysts linking the euro’s decline to efforts to cut ties to Russian oil and gas.
“The outlook for the euro is now tied to energy security risks,” said Jane Foley, currency strategist at Rabobank.For traders, risk intensifies after Russia cuts gas sales to Poland There was also Bulgaria at the end of last month, she added.If gas supplies to Europe are cut off by a self-imposed embargo or Russia, the region is likely to fall into recession because Replacing Russia’s energy supply is challenging.
A stronger dollar also dragged the euro closer to parity. The U.S. dollar has emerged as a preferred safe haven for investors, outperforming other currencies also considered safe havens, as the risk of stagflation — an unhealthy combination of stagnant economic growth and rapid inflation — spreads across the globe. Last week, the Swiss franc fell below par for the first time in two years against the dollar. JPY At the lowest level since 2002, it has created an unnecessary source of inflation for a country accustomed to low or falling prices.
There are many reasons why investors look for a safe place to store their funds. China’s economy has grown sluggishly due to shutdowns due to the country’s zero-virus policy. There is a recession risk in Europe, and forecasts of a U.S. recession next year are growing.Many so-called emerging markets are being hit by rising food prices as the crisis worsens in these regions, including East Africa and the Middle East.
“The global economic outlook is quite grim,” Ms Foley said. It “screams safe haven, screams dollar”.
The Russian-Ukrainian War and the Global Economy
Also good for the dollar Aggressive action by the Fed. With U.S. inflation hovering at the highest level in 40 years, the central bank has stepped up monetary tightening, raising interest rates in a row, with more to come. Traders are betting that U.S. interest rates will climb another 2 percentage points early next year to 3 percent, the highest level since 2007.
By contrast, the European Central Bank has only just begun to send a strong signal that it will start raising interest rates, as soon as July. This will be the first increase in more than a decade. But even if policymakers get their act together, it may take more than one policy meeting to get one of the key rates above zero. The deposit rate is the rate banks receive for overnight deposits at the central bank and is -0.5%.What analysts are now debating is how far above zero Banks can get before they have to stop raising interest rates because the economy is too fragile to support them.
In financial markets, “the worry now is that the ECB won’t have time to stop the slide to parity,” Marinov said.
Marinov added that the central bank has a few options – it could raise rates at its next policy meeting in June to surprise markets and prevent a further sharp fall in the euro, or it could initiate a much higher-than-expected hike interest plan.
The bank’s policymakers are closely watching the exchange rate. On Monday, François Villeroy de Garau, President of the French Central Bank and member of the European Central Bank’s Governing Council, Says officials are carefully monitoring exchange rates Because it is the “important” cause of inflation. “A weaker euro would defeat our price stability objective,” he said.
The slide in the euro could also pose a challenge to U.S. companies operating in Europe. Last month, Mastercard said it expected a stronger dollar against the euro to dent some of the company’s growth potential this year. Johnson & Johnson said the “adverse” impact of currency on sales this year will be $2.5 billion.
But the euro’s fall below parity is uncertain.A member of the ECB Governing Council advised the bank Likely to raise interest rates significantly A quarter of a basis point move than expected. On Friday, the euro was trading at $1.058.
Ironically, the euro may refuse to reach and fall below parity, as that level would be seen as unjustly low. According to Mr Marinov, parity means the euro is undervalued and oversold.
“The further we go into that area, the less persuasive it is to basically follow the euro lower,” he said.