The battered euro is edging ever closer to parity as the dollar runs rampant

Europe’s common currency neared parity with the US dollar on Tuesday as energy concerns and the risk of a recession weighed on the euro-zone outlook, while risk aversion fueled a broad rally in the greenback.

The euro fell as much as 1.3 percent to $1.0005, beating last week’s low. The last time it was this low was in 2002. The Bloomberg Dollar Spot Index is up 1.2 percent so far this week.

The euro’s downward spiral was swift and brutal as it traded around $1.15 in February. A series of increasingly large rate hikes by the US Federal Reserve has boosted the dollar, while Russia’s invasion of Ukraine has hurt euro-zone growth prospects and pushed up the region’s energy import costs.

“The logic governing the FX market and across all assets remains the same: the Fed still has more leeway for future rate hikes, also on the back of the strong US June jobs report,” Unicredit analysts wrote in a note. “On the other hand, other central banks like the ECB and BoE may be forced to become more cautious as their respective economies are more directly exposed to the gas and energy crisis.”

According to Jennifer McKeown, head of global economic services at Capital Economics, a weak euro has uncovered a key obstacle for the European Central Bank as the organization must address the risk that rate hikes could push peripheral eurozone bond yields much higher. For this reason, the market is focused on whether the central bank can keep peripheral bond spreads tight with a new anti-fragmentation tool and allow it to continue raising interest rates in response to high inflation.

“Often people would look at a weaker euro and say that’s good for export,” McKeown said. “But right now it’s seen as more of a negative. It increases inflationary pressures in the form of imported inflation, which the ECB really doesn’t want.”

Shorting the common currency was one of the most popular trades among FX professionals last week. The euro position saw the largest weekly change against other major currencies, with accounts adding $769 million to a total of $2.2 billion in net short bets, the most since late November, the wrote Scotiabank strategists Shaun Osborne and Juan Manuel Herrera Betancourt in a report Monday.

George Saravelos, Deutsche Bank’s global head of FX research, told Bloomberg Surveillance he could see the euro moving below par, particularly in the scenario of a “full gas shutdown” from the Nord Stream 1 pipeline. The bank views the euro as ranging from 0.95 to parity against the dollar, he said.

“I really wouldn’t say 0.95 is unreasonable,” said Saravelos. “Even if this gas returns in full flow after the maintenance period is over, the (risk) premium is not likely to go away. And I think that’s a critical thing that’s changed in the past few weeks.”

Citigroup analyst Tom Fitzpatrick said he was going “all in” to short the euro against the greenback, pricing a put on the euro-dollar pair at 0.95.

Still, some strategists were less optimistic about the dollar and the euro’s near-term trajectory.

“It’s hard to argue against owning the USD with such an aggressive stance from the Fed and the myriad problems in Europe,” said Brad Bechtel, FX strategist at Jefferies LLC. “However, EUR/USD feels like it is oversold due to many technical actions and parity has been such a target for so many people in the market that it wouldn’t be surprising if we see a lot of profit taking here and in the short-term would bounce.”

The dollar rose against most G10 currencies on Tuesday, pushing sterling down 0.2 percent to a two-year low, while the greenback rose almost 1 percent against the South Korean won.

https://www.independent.ie/business/world/battered-euro-edges-ever-closer-to-parity-as-dollar-runs-rampant-41832753.html The battered euro is edging ever closer to parity as the dollar runs rampant

Fry Electronics Team

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