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Euro’s slide towards dollar parity reflects heavier hit from Ukraine war - Dailyforextrading.net

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Euro’s slide towards dollar parity reflects heavier hit from Ukraine war - Dailyforextrading.net

Croatia cleared the final hurdle to achieve its long-held ambition to become the 20th member of the single currency — a move its central bank chief Boris Vujčić said would bring “more security” and “raise living standards for our citizens”. But while Zagreb wants in, foreign exchange markets want out.

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The euro is now worth just a fraction above a single dollar for the first time since 2002, reviving memories of its difficult early years, when it fell so low traders dubbed it the “toilet currency” and major central banks launched a concerted intervention to instil faith in the project.

Making up a fifth of global foreign exchange reserves and a quarter of global bond issuance, the euro is no longer written off as a doomed endeavor.

However, parity with the dollar highlights the widening gulf between the economic prospects of the US and the eurozone, which is more exposed to the fallout of the war in Ukraine.

The euro’s weakness, which will raise the price of imports, will worry policymakers already grappling with record-high inflation.

“There’s a feeling out there that the eurozone economy just won’t be robust enough and will be part of the global slowdown,” said Alan Ruskin, Deutsche Bank’s chief international strategist.

The euro’s swift fall, from $1.19 this time last year to $1.0057 as of Tuesday evening, comes amid fears Russia may cut off its already diminished supply of natural gas to Europe, forcing energy to be rationed and triggering a painful recession across the region.

“We went on buying the dollar when we started to get worried that the global economic landing might be harder, not softer,” said Kit Juckes, a currency strategist at French bank Société Générale.

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“The other main currency in the world [the euro] is massively handicapped by the fact that its energy crisis is potential of a completely different magnitude.

The greenback has soared against most currencies — not only the euro — on the back of a series of rate rises by the Federal Reserve, culminating in a 75 basis point increase last month that took the target range to between 1.5 per cent and 1.75 per cent.

“Monetary policy in the US still drives the euro more at this stage than the European Central Bank does,” said Dirk Schumacher, head of Europe macro research at Natixis. “The Fed is the main driver of the euro.”

The euro has performed better on a trade-weighted basis, where it is measured against a basket of 42 currencies — falling by only 1.6 per cent since the turn of the year, compared with 11 per cent against the dollar.

The ECB is yet to raise rates from their record low level of minus 0.5 per cent, but is expected to do so next week with a modest quarter-point rise.

A string of increases by the Bank of England has not protected sterling from the greenback’s strength. “The pound also depreciated 11 per cent against the dollar since the end of last year,” said Vítor Constâncio, former vice-president of the ECB.

Robin Brooks, the chief economist at the Institute for International Finance, a banking trade group, said currency traders were betting a severe downturn later this year would prevent the ECB from raising rates much above zero.

“The cumulative damage to the eurozone is already great,” said Brooks, a former currency specialist at Goldman Sachs. “Foreign exchange markets are leading the rest of the trading complex on this.”

Highlighting the gloom, the ZEW think tank’s monthly gauge of investor expectations for the German economy fell to its lowest level since the eurozone sovereign debt crisis started in 2011 June.

The impact of the strong dollar is especially great at a time when the cost of energy, which is priced in the greenback on international markets, is soaring. Deutsche Bank has estimated the eurozone will suffer a €400bn negative hit to its balance of trade this year if prices remain at current high levels.

The decline of the single currency also boosts inflation, pushing up the price of imports and contributing to a record 8.6 per cent surge in consumer prices in the year to June.

For every 10 per cent depreciation of the euro against the dollar, an extra 0.2 percentage points are added to eurozone inflation in the next year, Schumacher estimated. “It is not a game-changer, but every little help, and I’m sure it would be welcome at the ECB if the euro rebounded,” he added.

While the euro’s fall against the dollar mostly reflects cyclical shifts in the global economy and not structural changes, some economists worry the energy crisis could have a lasting impact on Europe’s competitiveness.

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Maria Demertzis, deputy head of the Brussels think-tank Bruegel, said: “If the change in the energy mix facing the EU changes its competitiveness that could mean the euro starts to come down, and that is one to watch.” Source: Financial Times...

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