For the first time in 20
years, the exchange rate between the euro (EUU) and the US
dollar has reached parity — meaning the two currencies are worth the same.
The euro hit $1 on
Tuesday, down about 12% since the start of the year. Fears of the recession on the
continent abound, stoked by high inflation and energy supply uncertainty caused
by Russia’s invasion of Ukraine.
The European Union, which
received roughly 40% of its gas through Russian pipelines before the
war, is attempting to reduce its dependence on Russian oil and gas. At the
same, Russia has throttled back gas supplies to some EU countries and recently
cut the flow in the Nord Stream pipeline to Germany by 60%.
Now that critical piece of gas
import infrastructure in Europe, has been shut down for scheduled
maintenance due to last 10 days. German officials fear that it may not be
turned on again.
The energy crisis comes
alongside an economic slowdown, which has cast doubts over whether the European
Central Bank can adequately tighten policy to bring down inflation. The ECB
announced that it will hike interest rates this month for the first time since
2011, as the eurozone inflation rate sits at 8.6%.
But some say the ECB is far
behind the curve, and that a hard landing is all but inevitable. Germany
recorded its first trade deficit in goods since 1991 last week as fuel prices
and general supply chain chaos significantly increased the price of imports.
“Given the nature of
Germany’s exports which are commodity-price sensitive, it remains hard to
imagine that the trade balance could improve significantly from here in the
next few months given the expected slowdown in the eurozone economy,” Saxo
Bank foreign exchange strategists wrote in a recent note.
A series of aggressive
interest rate hikes by central banks, including the Fed, coupled with slowing
economic growth will keep pressure on the euro while sending investors toward
the US dollar as a safe haven, say analysts.
The US Federal Reserve is well
ahead of Europe on tightening, having hiked interest rates by 75 basis points
while indicating that more rate increases will come this month.
This safe haven retreat into
the US dollar could become even more extreme if Europe and the US enters a
recession, warned Deutsche Global Head of FX Research George Saravelos in a
note last week.
A situation where the euro is
trading below the US dollar at a range of $0.95 to $0.97 could “well be
reached,” wrote Saravelos, “if both Europe and the US find themselves
slip-sliding in to a (deeper) recession in Q3 while the Fed is still hiking
rates.”
That’s good news for Americans
with plans to visit Europe this summer but could spell bad news for economic
global stability.
