Euro rebounds after ‘effectively’ reaching parity with dollar

The euro rebounded on Tuesday after earlier sliding to a 20-year low and effectively reaching parity against the US dollar as investors worried that an energy crisis in the region would tip the economy into recession.

The single currency reached $1.00005 against the greenback, the lowest since December 2002, after data showed that German investor sentiment plunged below levels at the outset of the coronavirus pandemic in July due to energy concerns, supply bottlenecks and rate hikes from the European Central Bank.

“For all intents and purposes, it effectively reached parity,” said Mazen Issa, senior FX strategist at TD Securities in New York.

“It seems like it’s a very gloomy outlook for the euro ... a sub-parity paradigm is very much in the cards,” Mr Issa said, adding that the single currency could drop to the $0.85-$0.90 area against the dollar.

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The dollar is benefiting from expectations that the Federal Reserve has more room to hike rates than peers, which are facing more challenging growth outlooks.

Concerns that Europe could fall into a recession have increased since the biggest single pipeline carrying Russian gas to Germany, the Nord Stream 1 pipeline, began annual maintenance on Monday. Governments, markets and companies are worried the shutdown might be extended because of the war in Ukraine.

The single currency was last $1.0050, after bouncing from the $1 level, which some analysts attributed to technical factors relating to options activity and short-covering.

Neil Jones, head of currency sales at Mizuho, said markets had been “short” on the euro in anticipation of a break below parity, but “we didn’t get it and now these shorts are buying back into the early New York market”.

Analysts said the weak economy had raised uncertainty over the ECB’s plan to raise interest rates, initially by 25 basis points in July, then by 50 bps in September.

“There doesn’t seem to be a lot of support for [the] euro at this point. It does not just relate to gas prices but to what seems to be a split within the ECB over how far they raise rates,” said Sarah Hewin, senior economist at Standard Chartered.

“The expectation is for the [US Federal Reserve] to do 75 basis points this month and its aim seems to be to get to neutral [rates] as soon as possible, while with [the] ECB it’s more of a mixed message given the backdrop over gas.”

Euro weakness has been a big part of the dollar index’s push higher, with the safe-haven US currency also supported by worries about growth elsewhere, with China in particular implementing strict zero-Covid policies to contain fresh outbreaks. The offshore-traded yuan approached a one-month low of 6.753 per dollar.

Arguably the biggest factor in the dollar’s rise, however, is the view that the Fed will hike rates more quickly and further than peers.

A possible catalyst that could push the euro back lower could be highly anticipated inflation data on Wednesday, which is expected to show that US consumer prices rose by an annual rate of 8.8 per cent in June.

“We may have to wait for US CPI ... or a clearer picture for European energy markets once planned maintenance in Nord Stream comes close to finalising for euro-dollar to break the [parity] threshold,” said Simon Harvey, head of FX at Monex Europe. – Reuters