Euro slumps to €1 = US$1 for first time in 20 years
It declines 12% to reach parity with US dollar, with analysts warning of further weakness
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A supermarket in Nice, France, last month. The euro's 12 per cent decline is the result of multiple pressures, from the war in Ukraine to an energy crisis and the growing risk of Russia cutting off gas exports and pushing the euro area into recession. It signals trouble for consumers in the €12 trillion (S$17 trillion) economy, feeding an inflation spike that is already out of control. PHOTO: REUTERS
LONDON • The euro has suffered a swift and brutal slump this year and has now crossed a major threshold for the first time in more than two decades - parity with the US dollar.
The 12 per cent decline is the result of multiple pressures, from the war in Ukraine to an energy crisis and the growing risk of Russia cutting off gas exports and pushing the euro area into recession.
Add in central banks moving at vastly different speeds and an in-demand US dollar, and some analysts say parity may not be the end point, but merely a stepping stone to further weakness.
The common currency slipped as much as 0.4 per cent on Wednesday to touch a low of US$0.9998.
The latest leg lower came after US inflation accelerated last month by more than forecast, boosting bets on Federal Reserve rate hikes.
It bounced back to trade at around US$1.002 as at 2.10pm on Wednesday in London.
The downward spiral has not been accompanied by the type of existential doubts that hung over the euro when it plunged during its infancy in the early part of this century, or when the sovereign debt crisis took hold a decade ago.
However, it is still a problem for the European Central Bank (ECB).
It is also trouble for consumers in the €12 trillion (S$17 trillion) economy, feeding an inflation spike that is already out of control, with prices rising at a record pace close to 9 per cent.
The depreciation has been incredibly rapid, given that the euro was trading close to US$1.15 in February.
It is all the more remarkable given that less than two years ago, ECB policymakers were concerned about excessive euro strength leading to an inflation undershoot.
Now they confront a different world: a dramatic plunge in their currency and consumer prices surging.
Some ECB policymakers have already signalled that the weakness is on their minds, particularly when it comes to imported inflation.
ECB policymaker Francois Ville-roy de Galhau said on Wednesday that the central bank is watching the euro's drop because of its effect on consumer prices.
In addition to the dual inflation-recession threat, the ECB is dealing with the risk of sovereign borrowing costs diverging too much as it reverses course on stimulus.
The euro's descent this year is just one part of a global story of US dollar dominance.
The greenback has been in favour this year as a haven investment, helped by higher US interest rates. There has also been speculation that the rally could spur global policymakers to intervene to weaken it at some point.
The single currency, meanwhile, has particularly suffered because of Europe's proximity to the Ukraine war and its reliance on energy imports from Russia.
Monetary policy is also a driving force, given that the ECB has been slow to join the kind of aggressive policy tightening being deployed elsewhere.
At the same time, increasingly large Fed interest rate hikes have supercharged the US dollar and created a rate differential that will keep the pressure on the common currency.
Nomura International strategist Jordan Rochester is already targeting further pain with a drop to 95 US cents.
Citigroup sees it sliding below that level if Russia cuts off gas exports to Europe.
The euro "remains effectively unbuyable this summer", Mr Kit Juckes at Societe Generale said earlier this month.
While the ECB could hike more aggressively to buoy the euro now - a rationale governing council member Robert Holzmann has used to justify a half-point rise - its agency may be limited by the darker economic outlook.
In a Bloomberg survey this month, economists put the risk of a euro area recession at 45 per cent, up from 30 per cent in June.
"No doubt the ECB will be quite concerned by the move, especially if it develops into a 'sell the euro zone' mentality," said ING Group strategists led by Mr Chris Turner.
"Yet, faced with the looming risk of recession - and the euro being a pro-cyclical currency - the ECB's hands may be tied in its ability to threaten more aggressive rate hikes in defence of the euro."
BLOOMBERG
