The euro fell to its lowest level in two decades on Tuesday amid fears of a recession in Europe on the back of soaring gas prices and Russia’s renewed threat to turn off the gas supply to the continent.
The euro lost 0.4% to a low of US$$1.0001 against the dollar, the weakest since December 2002, then reached parity just after 11.30 Central European Time.
It coincides with yesterday’s closure by Russia of the Nord Stream 1 gas pipeline for maintenance, disrupting a source of around 55bn cubic metres of natural gas every year under the Baltic Sea. The maintenance is scheduled to last for ten days.
Helped by its central bank rushing to raise rates in an attempt to control inflation, the dollar has cemented its role as the safe-haven currency for investors worried about the economy.
The US currency has been boosted by expectations that the Federal Reserve will hike rates faster and further than peers, while the the euro is dragged down by concerns that an energy crisis and the European Central Bank's eventual rate hikes will combine to tip the region into a recession.
At its meeting on July 26-27, the Fed is expected to raise interest rates by 75 basis points, with the Fed funds futures market pricing a rise in its benchmark rate to 3.50% by next March from the current 1.50-1.75% target.
Survey results released by the New York Fed on Monday indicate that US consumers expect inflation to rise further in the coming year, but at a modest pace over the longer term.
A record 8.6% inflation rate in the euro zone in June led the European Central Bank to announce it would raise interest rates for the first time in 11 years at its July meeting.
Live look at the EUR pic.twitter.com/fRVxzJnFKp
— AndreasStenoLarsen (@AndreasSteno) July 12, 2022
"Politicians, investors and speculators see risk that Putin may not turn the [Nord Stream] taps back on in time or that a reduced supply could come back online as the economic war between Russian and the West and its allies intensifies," said Jane Foley, head of FX strategy at Rabobank.
"If the scheduled maintenance of the pipeline is extended it would undermine the ability of Europe to store gas in preparation for winter. The result could be even higher energy prices or, potentially rationing for heavy industrialised users.
"In turn this could means job losses in Europe and recession. Not only does the latter imply that the window of opportunity for the ECB to hike rates would be limited, but it also increases the likelihood of fragmentation issues coming to the fore within the Eurozone.
"All of this spells out why the EUR has been under pressure. The fact that last week’s better than expected US payrolls report has underpinned the view that the Fed will hike rates by 75 bps later this month is only serving to enhance the pressure on EUR/USD."
Fawad Razaqzada, market analyst at City Index said: "The fact that the EUR/USD has just broken parity after a slow grind lower, rather than a sudden move, means there’s consistent and continued selling of the euro and buying of dollar, rather than some sort of market manipulation.
He added: "Given the historical and psychological importance of this level, we may initially see some wild price movements on the lower time frames. But if there’s acceptance below 1.0000 then it is anyone’s guess far it could fall before stabilising."