For the first time in 20 years, the exchange rate between the euro and the US dollar is almost the same – the two currencies are less than one cent away from parity.
The euro hovered around $ 1,004 on Monday afternoon, down around 12% since the beginning of the year. Fear of recession on the continent abounds, driven by high inflation and uncertainty about energy supply caused by Russia’s invasion of Ukraine.
The European Union, which received About 40% of the gas through Russian pipelines before the war, is trying to reduce its dependence on Russian oil and gas. At the same time, Russia has restricted gas supplies to some EU countries and recently cut power in the Nord Stream pipeline to Germany by 60%.
The critical part of the gas import infrastructure in Europe has now been closed for scheduled maintenance due to the last 10 days. German officials fear it will not be turned on again.
The energy crisis comes with an economic downturn, which has cast doubt on whether the European Central Bank can tighten policy sufficiently to bring inflation down. The ECB announced that it will raise interest rates this month for the first time since 2011, as the inflation rate in the eurozone is 8.6%.
But some say that the ECB is far behind the curve, and that a hard landing is anything but inevitable. Germany recorded its first trade deficit in goods since 1991 last week when fuel prices and general chaos in the supply chain increased import prices significantly.
“Given the nature of Germany’s commodity – price exports, it is still difficult to imagine that the trade balance could improve significantly from here over the next few months given the expected downturn in the eurozone economy,” Saxo Bank’s currency strategists wrote in a recent note.
A series of aggressive rate hikes from central banks, including the Fed, combined with declining economic growth will keep the pressure on the euro while sending investors against the US dollar as a safe haven, analysts say.
The US Federal Reserve is well ahead of Europe in terms of austerity, and has raised interest rates by 75 basis points while indicating that more interest rate hikes will come this month.
This safe haven retreat to the US dollar could be even more extreme if Europe and the US enter a recession, warned Deutsche Global Head of FX Research George Saravelos in a note last week.
A situation where the euro is trading below the US dollar in a range of $ 0.95 to $ 0.97 can be “well reached”, Saravelos wrote, “if both Europe and the US find themselves slipping into a (deeper) recession in the third quarter while the Fed continues to raise interest rates. ”
This is good news for Americans planning to visit Europe this summer, but it may be bad news for global economic stability.