The weakened euro could become equal to the US dollar

The list of ills plaguing the euro zone economy was already harsh: the highest rate of inflation on record, energy insecurity and growin...


The list of ills plaguing the euro zone economy was already harsh: the highest rate of inflation on record, energy insecurity and growing rumors of a recession. This month, another threat emerged. The weakening of the euro has raised expectations that it could reach parity with the US dollar.

Europe faces “a steady stream of bad news,” said Valentin Marinov, currency strategist at Credit Agricole. “The euro is a pressure valve for all these concerns, all these fears.”

The currency, which is shared by 19 countries, has not fallen at or below a one-to-one exchange rate with the dollar in two decades. At the time, in the early 2000s, the weak exchange rate undermine confidence in the new currency, which was introduced in 1999 to help bring unity, prosperity and stability to the region. At the end of 2000, the The European Central Bank intervened in the foreign exchange markets to support the nascent euro.

Today, there are fewer questions about the resilience of the euro, even as it sits near its lowest level in more than five years against the dollar. Instead, currency weakness reflects the Darkening outlook for the bloc’s economy.

Since Russia invaded Ukraine in late February, the euro has fallen more than 6% against the dollar as governments seek to cut Russia off from energy supplies, trade channels are disrupted and inflation is imported to the continent via high energy, commodity and food prices.

While a weak euro is a boon for American vacationers heading to the continent this summer, it only compounds the region’s inflationary problems by raising the cost of imports and reducing the value of European profits for businesses. Americans.

Many analysts have determined that parity is only a matter of time.

A euro will be worth a dollar by the end of the year and will fall even lower at the beginning of next year, according to analysts at HSBC, one of Europe’s largest banks. “We struggle to see a silver lining for the single currency at this point,” they wrote in a note to clients in early May.

Traders are watching to see if the euro will fall below $1.034 against the dollar, the lowest it hit in January 2017. On May 13, it moved closer, falling to $1.035.

Below this level, the prospects of seeing the euro reach parity become “quite material”, according to analysts at the Dutch bank ING. Analysts at Japanese bank Nomura expect parity to be reached within the next two months.

For the euro, “the path of least resistance is lower,” JPMorgan analysts wrote in a note to clients. They expect the currency to reach parity in the third quarter.

Economists at Pantheon Macroeconomics said last month that a Russian gas embargo would push the euro to parity with the dollar, joining other analysts linking the sinking euro to efforts to cut oil and gas ties. gas companies with Russia.

“The outlook for the euro is now very, very much about energy security risk,” said Jane Foley, currency strategist at Rabobank. For traders, the risks intensified after Russia cuts gas sales to Poland and Bulgaria at the end of last month, she added. If gas supplies to Europe are interrupted either by a self-imposed embargo or by Russia, the region risks tipping into recession as replacing Russian energy supply is a challenge.

The strength of the US dollar also pulled the euro close to parity. The dollar has become investors’ safe haven of choice, outperforming other currencies that have also been seen as safe places for money as the risk of stagflation – an unhealthy mix of stagnant economic growth and rapid inflation – lurks. in the world. Last week, the Swiss franc weakened to parity with the dollar for the first time in two years, and Japanese yen is at its lowest level since 2002, bringing an unwanted source of inflation to a country used to low or falling prices.

There are many reasons why investors look for safe places to park their money. Economic growth is slow in China due to shutdowns prompted by the country’s zero-Covid policy. There are recession risks in Europe and growing expectations of a recession in the United States next year. And many so-called emerging markets are being battered by rising food prices, worsening crises in areas such as East Africa and the Middle East.

“It’s a pretty bleak outlook for the global economy,” Ms Foley said. He “shouts for refuge and he cries out for the dollar”.

Also in favor of the dollar is the aggressive Federal Reserve action. As US inflation hovers around its highest rate in four decades, the central bank has intensified its monetary policy tightening with successive interest rate hikes, and many more are expected. Traders are betting U.S. interest rates will climb another 2 percentage points by early next year to 3%, the highest level since 2007.

By comparison, the European Central Bank has only just begun to send strong signals that it will start raising rates, maybe as soon as July. It would be the first increase in more than a decade. But even when policymakers begin, it will likely take more than one political meeting to get one of the key interest rates above zero. The deposit rate, which is what banks receive for depositing money with the central bank overnight, is minus 0.5%. The question currently debated by analysts is how far above zero the bank could get ahead of having to stop raising interest rates because the economy is too fragile to support them.

On the financial markets, “the concern now is that the ECB is coming too late to stop a slide towards parity,” Mr Marinov said.

The central bank has a few options – it could raise rates at its next policy meeting in June to surprise the market and prevent the euro from weakening further, or it could embark on a much larger rate hike program than expected, Mr. Marinov added. .

The bank’s decision makers are watching the exchange rate carefully. On Monday, Fran├žois Villeroy de Galhau, governor of the French central bank and member of the board of governors of the European Central Bank, said officials were carefully monitoring the exchange rate because it is a “significant” cause of inflation. “A euro that is too weak would run counter to our objective of price stability,” he said.

The fall of the euro could also pose a challenge for American companies operating in Europe. Mastercard last month said it expected the strength of the dollar against the euro to dampen some growth potential for the company this year. Johnson & Johnson said the “adverse” currency impact on sales would be $2.5 billion for the year.

But the fall of the euro to parity and below is not guaranteed. The currency moved away from its lows this week after a member of the European Central Bank’s Governing Council suggested that the bank could increase rates on larger jumps than the expected move of a quarter basis point. On Friday, the euro was trading at $1.058.

Ironically, the Euro might resist reaching and falling below parity as this level would be deemed unfairly low. According to Mr. Marinov, parity would mean that the euro was undervalued and oversold.

“The deeper we get into this territory, the less compelling the euro’s continued decline will become,” he said.

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Newsrust - US Top News: The weakened euro could become equal to the US dollar
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