The euro dropped below parity against the dollar on Wednesday for the first time in almost two decades, as a hawkish US Federal Reserve and growing concern about rising recession risks in the euro zone continued to batter the currency.
The latest slide came after another hot set of US inflation data, which showed consumer prices rising by a greater than expected 9.1 per cent in the year to June, up from 8.6 per cent in May, to a level not seen in more than 40 years. Economists had projected a rate of 8.8 per cent.
The figure is seen as increasing the chances of a further 75-basis point increase in interest rates when the Fed next meets.
Europe’s single currency started this year on a strong note given a post-pandemic economic recovery. But Russia’s invasion of Ukraine, surging European gas prices and fears that Moscow could cut off supplies further have raised the spectre of recession and hurt the euro.
Policy stance
Heightened global uncertainty and an aggressive Fed monetary policy stance, meanwhile, have benefited the safe-haven dollar.
The euro tanked as much as 0.4 per cent to a low of $0.9998 at 13:45 Irish time, its lowest level since December 2002. It bounced back slightly and is trading at $1.005, having lost more than 10 per cent so far this year.
“Gas rationing, stagflation, an expected recession, they are all good reasons to be bearish on the euro,” said Stuart Cole, head macroeconomist at Equiti Capital in London before the euro crossed that threshold.
He added that these factors will make it harder for the European Central Bank (ECB) to hike interest rates, further widening the interest-rate differential with the United States.
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Since becoming available freely in 1999, the single currency has spent very little time below parity. In fact, the last time it did so was between 1999 and 2002, when it sank to a record low of $0.82 in October 2000.
Within its relatively short two-decade history, the euro is the second most sought-after currency in global foreign exchange reserves and daily turnover in the euro/dollar is the highest among currencies in the global $6.6 trillion-per-day market.
The euro's slide is a headache for the ECB. Allowing the currency to fall only fuels the record-high inflation the ECB is battling to contain. But trying to shore it up with higher interest rates could exacerbate recession risks.
The ECB has so far played down the issue, arguing that it has no exchange rate target, even if the currency does matter. Also on a trade-weighted basis — against its trade partners’ currencies — the euro is down only 3.6 per cent this year. — Reuters
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