The euro is trading at a two-decade low against the dollar, and it could slide further

Traders work on the floor of the New York Stock Exchange during morning trading on August 15, 2022 in New York City.

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The euro was trading at a two-decade low of 0.9903 against the US dollar on Tuesday morning, with analysts predicting that the single currency will continue to slide.

“Our outlook and our trades and our position on the strategy side is definitely biased against further euro weakness from where we are now,”[ads1]; Luis Costa, head of CEEMEA strategy at Citibank, told CNBC’s “Squawk Box Europe” on Tuesday.

“This is the main point of euro vulnerability now,” Costa said.

There are several factors at play when comparing the euro and dollar, working together with the ongoing conflict in Ukraine and rising inflation in both regions.

Wholesale gas prices in Europe rose sharply on Monday after Russia announced unscheduled maintenance on the main pipeline to Germany, Nord Stream 1, while heat waves have put further strain on energy supplies.

For the full picture, one must also look beyond Europe and the USA, says Costa.

“Let’s not forget that there is an additional layer of complexity here from the slowdown in China, which is obviously hitting Europe with a much greater force compared to the impact in the States,” he said.

China missed GDP expectations with growth of just 0.4% in the second quarter. The world’s second largest economy has struggled with the aftermath of the country’s worst Covid-19 outbreak since the start of 2020.

Until May, markets considered hawkish flight paths for the European Central Bank and the Bank of England, according to Costa, but those plans have “imploded” in recent months.

“Talking about ECB lifting… It is quite insightful that the ECB’s room to raise interest rates will be minimal,” he said.

Global financial institution ING’s Roelof-Jan Van den Akker made similar predictions on CNBC’s “Squawk Box Europe” last week, suggesting a widening of the interest rate differential between the US dollar and the euro, as well as a further weakening of the single currency.

“[The dollar] broke below the 103.60 support level. There is a very crucial horizontal support … And I suggest that there is further downside potential to go. Long-term target of between $0.80 to $0.75 in the coming months,” Van den Akker said.

“It confirms that there is dollar strength as well as euro weakness,” he told CNBC.

The predictions reflect concerns that inflation will continue to rise and that a recession in Europe is now inevitable.

The dollar’s strength may not last, according to Societe Generale macro strategist Kit Juckes.

“Perhaps, all in all, the dollar rally has gone as far as it can go on the current news,” he wrote in an email Tuesday morning.

“That’s not to say that Europe’s energy woes, China’s economic weakness and policy easing, and US jobs/inflation data can’t send it on, but when I read that buying dollars is “the easiest currency to trade” the hairs on my back. of my neck warns me to be careful,” Juckes wrote.

And Europe should be able to recover from these “sufferings”, according to the strategist.

“I still don’t see how it can accumulate much on anything other than short covering, but if risk markets don’t disrupt, the euro could find a base here,” he wrote.

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