The euro has hit parity with the United States dollar. By 10:00 GMT on Tuesday, the euro was at a low of $1, its weakest in more than 20 years.
The US dollar is roaring to two-decade highs against multiple currencies.
The euro has been vulnerable because of the spike in natural gas prices in the region and the war in Ukraine. The European Union, which received approx 40% of its gas through Russian pipelines before the war, is trying to reduce its dependence on Russian oil and gas.
Moreover, Russia has throttled back gas supplies to some EU countries and recently cut the flow in the Nord Stream pipeline to Germany by 60%.
So far, 12 European Union nations have experienced a whole or partial decrease in Russian gas. For a scheduled 10-day maintenance, supplies from the Nord Stream 1 pipeline were suspended earlier this week.
With tensions between Europe and Russia at their highest in decades over the war in Ukraine, officials are concerned that gas supplies may not be resumed on July 21 once the scheduled maintenance work is complete – exacerbating Europe’s energy supply crunch and potentially speeding a recession
On the other hand, the European Central Bank announced that it will hike interest rates this month for the first time since 2011, as the eurozone inflation rate sits at 8.6%.
Reactions to the falling value of Euro
Mizuho analysts said the move towards Euro parity was happening as “recession in the eurozone is priced in”, and said the backdrop suggested little to improve risk sentiment. SG Futures said this is a “catastrophe” for the European Union as energy imports run the risk of becoming more pricey.
“Energy supply is already unaffordable and as we head into winter it’ll likely get even worse,” it added in a tweet.
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, as China, in particular, implements strict zero-COVID policies to contain fresh outbreaks.
The most important biggest factor in the dollar’s rise is the view the Federal Reserve will hike rates faster and further than peers.
The focus for this week will be macro data including US consumer inflation on Wednesday, and comments from Federal Reserve officials as investors look for clues on the outcome of its upcoming policy meeting before the pre-meet blackout period, when trading activity is curtailed.