The block’s currency fell to $0.9998 against the greenback, falling below the $1 level for the first time since December 2002 euros back to $1,023. It has already sunk nearly 12 percent this year, adding to fears Eurozone could end up in a disastrous recession. The situation worsened on Wednesday when it was announced that US consumer price inflation had risen to 9.1 percent – the highest in more than 40 years.
The euro briefly passed parity against the US dollar this morning, but it was enough to send shockwaves through Europe’s largest stock market indices.
Germany’s DAX and France’s CAC40 nearly doubled their morning losses to 1.5 percent and 1.4 percent respectively, while the FTSE in London was not far behind as another four percent rise in gas prices added further pressure.
The euro had started the year strong, but the eurozone has been plagued by an energy crisis fueled by sanctions against Russia after the invasion of Ukraine.
Fears of a recession seem greater than ever since the largest pipeline carrying Russian gas to Germany, the Nord Stream 1 pipeline, began annual maintenance on Monday.
There are concerns that when this maintenance is completed, Vladimir Putin could cut off Russia’s gas supplies to Europe, a move that would push fuel prices even further.
Price pressures in the eurozone increased again last month as inflation rose to 8.6 percent – up from 8.1 percent in May.
Despite some traders pointing to support in the market, companies like JPMorgan have warned that the euro could fall to $0.90 if Russia now severely curtails gas supplies in the region.
There is also growing fear that an ongoing sharp economic slowdown in the eurozone will leave European Central Bank (ECB) interest rates well below those of the US Federal Reserve.
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In 2020, the central bank published a paper citing models that estimate that a one percent devaluation of the euro against a host of other currencies could add as much as 0.11 percentage points to inflation within a year — and 0, 25 percentage points over three years.
ING economist Chris Turner warned if the euro continues to fall: “without a doubt” [the ECB] will be quite concerned about the move, especially if it evolves into a ‘sell the eurozone’ mentality”.
He added: “Yet faced with the looming risk of a recession – and the euro is a pro-cyclical currency – the ECB may become stuck in its ability to threaten more aggressive rate hikes in defense of the euro.”
Over the weekend, IIF chief economist Robin Brooks warned that the euro’s current sharp decline “has a lot more leeway and we are “just getting started”.
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He tweeted: “When an exchange rate is moving, it is always a question of whether there is still a long way to go or whether the movement is complete.
“The fall of the euro has MUCH more room to go. The 2-year yields in the euro zone have only just begun to fall against US rates. We are just getting started…”
Referring to rising US inflation relative to the plunging euro, Close Brothers Asset Management’s chief investment officer Robert Alster said: “CPI of 9.1 percent is the highest number in 40 odd years, the only good news is that core inflation light is lower.
“And europarity – well, the European economic outlook is getting worse, especially if Russian gas doesn’t come through again.”
Lou Brien, a market strategist at DRW Trading in Chicago, said: “The sanctions that are trying to harm Russia are also affecting the European Union.
“They are in a difficult time to get out of the pandemic, but this extra layer of problems also makes the euro less attractive.”