Deepest fears about the health of the global economy have caused the euro to be equated with the US dollar for the first time in 20 years.
Investors gravitate toward the perceived security of the dollar in times of stress, a feature that sparked a fierce rebound in the U.S. currency when the coronavirus pandemic took root in 2020. But that shock did not drag the euro down. this point. Nor was the debt crisis that came close to dismantling the currency bloc a decade ago.
Now, however, the risk that aggressive interest rate hikes could cause the United States to fall into recession, combined with the possible damage to the European economy resulting from its dependence on Russian energy, has been enough to tip the euro finally 0.4% lower on Wednesday. to reach the historic milestone.
“It’s all about the context of risk and the threat to European growth in energy dependence which, in turn, is now affecting long-term rate expectations,” said Kit Juckes, strategist at Société Générale in London .
Analysts are preparing for a recession in both Europe and the United States, with George Saravelos, head of European currency strategy at Deutsche Bank, predicting “an impending recession on both sides of the Atlantic.” US bank Goldman Sachs has warned that the eurozone is already “on the brink of recession”. The euro has fallen 16% against the dollar in the last year and 12% in 2022.
Compared to a basket of currencies of major trading partners, the euro is not noticeably weak. On that basis, it has fallen a modest 3.6 percent this year, according to a Deutsche Bank index, to a five-year low.
But the dollar has been rising. The dollar index has risen 13 percent this year to its highest point in two decades, breaking other major currencies such as the yen and the pound sterling, and fueled by an aggressive U.S. Federal Reserve that has rapidly raised interest rates. of interest in dealing with inflation. to the maximums of 40 years.
Concerns about the Fed’s rapid rate hike intensified Wednesday after a Labor department report showed U.S. consumer prices rose at an annual rate of 9.1 percent in June, up from 8, 8 percent predicted by economists.
Meanwhile, the Russian invasion of Ukraine has imposed strong and specific pressures on the neighboring eurozone.
In a context of rising energy prices, bloc countries have rushed to seek new supplies outside Russia. Germany has even resorted to gas and electricity rationing, which has raised new concerns about the gravity of the situation as the colder winter months approach.
Inflation in the euro area reached a record 8.6 percent in June; on paper, the stage was set for the highest interest rates in the euro area. But business activity surveys in the region have been disappointing in recent weeks, complicating the European Central Bank’s outlook when it seeks to tighten monetary policy in the face of slowing growth.
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“It’s energy, it’s business confidence [and] it’s inflation, ”said Jane Foley, head of Rabobank’s foreign exchange strategy, adding:“ The euro always has staunch investors. [but] settings seem to have changed “.
The possibility of any multilateral action to try to reduce the US dollar is low. In part, this is because change is occurring in small increments rather than in large destabilizing reservoirs. But in addition, the battle of political leaders against inflation is likely to predominate.
“It simply came to our notice then [from intervention]”, Said Joachim Fels, global economic advisor of the investment firm Pimco. “It seems pretty neat and they’re totally focused on inflation. Opening up another front would be difficult.”