Europe’s common currency yesterday edged closer toward parity with the US dollar as energy concerns and the risk of recession weighed on the outlook for the eurozone, while risk aversion fueled a broad rally in the greenback.
The euro dropped as much as 1.3 percent to US$1.0005, eclipsing its low from last week. The last time it was this low was in 2002.
The Bloomberg Dollar Spot Index has jumped as much as 1.2 percent so far this week.
The euro’s downward spiral has been swift and brutal, given it was trading around US$1.15 in February. A string of increasingly large US Federal Reserve interest-rate hikes has supercharged the greenback, while Russia’s invasion of Ukraine has worsened the outlook for growth in the eurozone and pushed up the cost of the region’s energy imports.
“The logic prevailing in the FX market and across assets remains the same: The Fed is still perceived as having more room to hike rates going forward, also on the back of the strong US jobs report for June,” Unicredit analysts wrote in a note. “On the other hand, other central banks, such as the ECB [European Central Bank] and the BoE [Bank of England], might be forced to become more prudent, given the more direct exposure their respective economies have to the gas and energy crisis.”
A weak euro has exposed a key constraint facing the ECB in that the organization must address the risk that raising rates might push yields on periphery eurozone bonds much higher, according to Jennifer McKeown, the head of global economics service at Capital Economics.
Because of this, market focus is on whether the central bank can keep peripheral bond spreads narrow using a new anti-fragmentation tool, and allow it to continue raising interest rates in response to high inflation.
“Often people would look at a weaker euro and say that’s good for exports,” McKeown said. “But at the moment, it’s viewed as more of a negative. It adds to inflation pressure in terms of imported inflation, which is something the ECB really doesn’t want.”
Shorts on the common currency were one of the most popular trades among foreign-exchange professionals last week.
The euro position saw the biggest weekly change compared with other major currencies, with accounts adding US$769 million to net short bets totaling US$2.2 billion, the most since November last year, Bank of Nova Scotia strategists Shaun Osborne and Juan Manuel Herrera Betancourt wrote in a report on Monday.
George Saravelos, global head of FX research for Deutsche Bank AG, told Bloomberg Surveillance that he could see the euro moving under parity, especially in the scenario of a “complete gas shutoff” from the Nord Stream 1 pipeline.
The bank is pricing the euro to move in between a range of 0.95 to parity against the US dollar, he said.
“I really wouldn’t say 0.95 would be unreasonable,” Saravelos said. “Even if this gas returns in terms of full flow after the maintenance period, the [risk] premium is unlikely to go away. And I think that’s a critical thing that’s changed over the past few weeks.”
Citigroup Inc analyst Tom Fitzpatrick said he was “going all-in” on shorting the euro versus the greenback, pricing a put on the euro-dollar pair at 0.95.
Still, some strategists were less sanguine about the US dollar and the euro’s near-term trajectory.
“It’s hard to argue against owning the USD with such an aggressive Fed posture and the myriad of issues in Europe,” said Brad Bechtel, foreign-exchange strategist at Jefferies LLC.
“Having said that it feels like EUR/USD is oversold on many technical measures and parity was such a target for so many people in the market that it wouldn’t surprise if we see a lot of profit-taking down here and a short-term bounce,” Bechtel said.
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