Economy

Euro drops to 20-year low against the dollar

Equities under pressure, oil slides and US bond market flashes warning on recession fears

Traders on the New York Stock Exchange. Photograph: Spencer Platt/Getty

Adam Samson
Ian Johnston
Tue Jul 5 2022 - 19:36

The euro dropped to its lowest level in two decades on Tuesday as traders rushed to the safety of the US dollar.

“The dollar remains this primary safe haven ...and that is a factor which is exacerbating the [euro] movement. People want dollars in times of stress and anxiety,” said Jane Foley, head of FX strategy at Rabobank.

Equities prices were also under pressure, with the US blue-chip S&P 500 down 0.9 per cent and Europe’s Stoxx 600 falling 2.1 per cent.

Economic angst deepened on Tuesday as Bank of England governor Andrew Bailey warned that “the global economic outlook has deteriorated markedly” and a strike at Norwegian gas and oilfields threatened to intensify upward pressures on European inflation.

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Oil sold off and the bond market flashed a warning sign over the trajectory of the US economy as recession fears gripped global markets.

Investor sentiment has weakened in recent days on signs that elevated prices of everything from fuel to food, along with rising borrowing costs, are taking a heavier toll on businesses and households.

Oil prices sustained their heaviest falls since March, as a jolt of concerns about demand hit the commodities market. Brent, the international benchmark, tumbled almost 11 per cent to $101.31 (€98.69) a barrel, while US marker West Texas Intermediate dropped 9.4 per cent to $98.25.

Citigroup commodities strategists said on Tuesday that a recession was “increasingly likely”. In that scenario, they said the oil price could reach $65 a barrel by the end of this year and $45 by the end of 2023, assuming Opec and its allies do not intervene in the market.

A survey late last week from the Institute for Supply Management on the US manufacturing sector pointed to declines last month in new orders and employment, which has triggered concerns about the state of the world’s largest economy.

An Atlanta Federal Reserve forecast that takes into account incoming economic data now points to an annualised decline of 2.1 per cent in US economic output in the second quarter, following a drop in the first quarter. A recession is typically defined as two consecutive quarters of contraction.

In a sign of the deteriorating long-term economic outlook, yields on 10-year US government bonds slumped below those on two-year notes for the third time this year. So-called “inversions” of the yield curve have preceded every US recession in the past 50 years, not immediately but within the subsequent two years.

Investors are already scaling back their expectations for Fed rate increases as the economic outlook darkens. Futures markets indicate that the Fed is now expected to lift rates to 3.3 per cent by early 2023, down from projections three weeks ago of 3.9 per cent.

The central bank’s benchmark interest rate currently stands at a range of 1.5-1.75 per cent, following a series of increases this year.

Details of the Fed’s most recent monetary policy meeting, due to be published on Wednesday, may give further clues about the extent to which the central bank is willing to tighten monetary policy. A closely watched US jobs report on Friday will also signal the level of heat in the country’s labour market, a criterion that may also influence Fed decision-making. — Copyright The Financial Times Limited 2022

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