The list of maladies afflicting the eurozone economy was already stark: all-time high inflation, energy insecurity, and growing whispers of recession. This month, another threat emerged. The weakness of the Euro has raised expectations that parity could be achieved with the US Dollar.
Europe is facing a “continuous stream of bad news,” said Valentin Marinov, currency strategist at Credit Agricole. “The euro is a pressure valve for all of these concerns, all of these concerns.”
The currency, shared by 19 countries, has not fallen to or below the one-to-one exchange rate with the dollar in two decades. At that time, in the early 2000s, the exchange rate was low Undermine confidence in the new currency, which was introduced in 1999 to help bring unity, prosperity and stability to the region. In the late 2000s, European Central Bank intervention In the currency markets to support the nascent euro.
Today, there are fewer questions about the resilience of the euro, even though it is near its lowest level in more than five years against the dollar. Rather, it reflects the weakness of the currency The bleak outlook for the mass economy.
Since Russia’s invasion of Ukraine in late February, the euro has fallen more than 6 percent against the dollar as governments seek to cut energy supplies to Russia, trade channels have been disrupted and inflation is importing into the continent via soaring energy, commodity and food prices.
While a weaker euro is a boon for American tourists heading to the continent this summer, it only adds to the region’s inflationary problems by increasing the cost of imports and undermining the value of European profits for American companies.
Many analysts have decided that parity is only a matter of time.
The euro will be worth $1 by the end of the year and will fall further early next year, according to analysts at HSBC, one of Europe’s largest banks. “We are finding it difficult to see a positive side for the single currency at this point,” they wrote in a note to clients in early May.
Traders are watching if the euro will drop below $1.034 against the dollar, which is the lowest it reached in January 2017. It came close on May 13, dropping to $1.035.
Below this level, the prospects of the euro reaching parity become “completely material”, according to analysts at Dutch bank ING Bank. Analysts at Japan’s Nomura Bank expect parity to be achieved in the next two months.
For the euro, “the path of least resistance is the least,” analysts at JPMorgan 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 a ban on Russian gas would push the euro into parity with the dollar, joining other analysts who have linked the plunging euro to efforts to cut ties with Russia in the oil and gas field.
“The outlook for the euro now is very, very much tied to energy security risks,” said Jane Foley, currency analyst at Rabobank. For traders, the risks intensified after that Russia halts gas sales to Poland and Bulgaria late last month, she added. If Europe’s gas supplies are cut off either by the embargo on itself or by Russia, the region will likely slide into recession. Replacing Russian power supplies is a challenge.
The strength of the US dollar also brought the euro closer to parity. The dollar has become the preferred haven for investors, outperforming other currencies that have also been seen as safe places of money as the world chases the threat of stagflation – an unhealthy combination of stagnant economic growth and rapid inflation. Last week, the Swiss franc fell below parity with the dollar for the first time in two years, and Japanese Yen It is at its lowest level since 2002, bringing an unwanted source of inflation to a country accustomed to low or falling prices.
There are plenty of reasons why investors look for safe places to park their money. China’s economic growth is slowing due to the lockdown caused by the country’s no-coronavirus policy. There are recession risks in Europe and rising expectations of a recession in the US next year. Many of the so-called emerging markets are being hit by rising food prices, exacerbating crises in areas including East of Africa and the Middle East.
“It’s a very bleak outlook for the global economy,” Ms Foley said. It’s a “safe haven that screams and screams dollars.”
Also in favor of the dollar is Aggressive action by the Federal Reserve. With US inflation hovering around its highest rate in four decades, the central bank has reinforced monetary policy tightening with successive increases in interest rates, and more is expected. Traders are betting that US interest rates will rise an additional 2 percentage points by early next year to 3 per cent, the highest level since 2007.
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In comparison, the European Central Bank has just started sending strong signals that it will start raising interest rates, Probably as soon as possible in July. It would be the first increase in more than a decade. But even when policymakers get started, it will likely take more than one political meeting to raise one of the key interest rates above zero. The deposit rate, which is what banks get for depositing money with the central bank overnight, is 0.5 percent. The question analysts are now discussing is How far above zero The bank can have it before it has to stop raising interest rates because the economy is too fragile to support it.
“The concern now is that the ECB will be too late to stop the slide toward parity,” Mr. Marinov said in financial markets.
Mr. Marinov added that the central bank had some options – it could raise rates at its next policy meeting in June to surprise the market and prevent the euro from weakening significantly further, or it could embark on a program to raise rates much higher than expected. .
Bank policy makers closely monitor the exchange rate. On Monday, François Villeroy de Gallo, Governor of the French Central Bank and member of the Governing Council of the European Central Bank, He said officials are carefully monitoring the exchange rate Because it is an “important” cause of inflation. “A very weak euro would interfere with our goal of price stability,” he said.
The drop in the euro could also pose a challenge to US companies operating in Europe. Last month, Mastercard said it expects the dollar’s strength relative to the euro to dampen some potential in the company’s growth this year. Johnson & Johnson said the “unfavorable” currency impact on sales would be $2.5 billion for the year.
But a drop in the euro to parity and below is not guaranteed. The currency retreated from this week’s lows after a member of the European Central Bank’s Governing Council suggested that the Bank Rates can be raised in bigger leaps of the expected movement of a quarter of a basis point. On Friday, the euro was trading at $1.058.
Ironically, the Euro could resist parity and fall below it because that level would be considered unfairly low. According to Mr. Marinov, parity means that the euro was undervalued and oversold.
“The deeper we go into that area, the less convincing the chase for a lower euro becomes,” he said.