The euro reached $ 1 on Tuesday, down 12% from the beginning of the year. Fears of recession abound on the continent, fueled by high inflation and the uncertainty of energy supply caused by the Russian invasion of Ukraine. The European Union, which received about 40% of its gas through Russian pipelines before the war, is trying to reduce its dependence on Russian oil and gas. At the same time, Russia has reduced its gas supply to some EU countries and recently cut the flow of the Nord Stream gas pipeline to Germany by 60%. Now, this critical piece of gas import infrastructure in Europe has been shut down for scheduled maintenance over the last 10 days. German officials fear it will not re-ignite.
The energy crisis is accompanied by an economic slowdown, which has raised doubts about whether the European Central Bank can properly tighten policy to reduce inflation. The ECB announced that it will raise interest rates this month for the first time since 2011, as the euro area inflation rate stands at 8.6%.
But some say the ECB is far behind the curve and a strong landing is almost inevitable. Germany recorded its first trade deficit in goods since 1991 last week, as fuel prices and general chaos in the supply chain significantly increased the price of imports.
“Given the nature of German exports that are sensitive to commodity prices, it is still difficult to imagine that the trade balance could improve significantly from here in the coming months given the expected slowdown in the economy of the eurozone, ”wrote Saxo Bank currency strategists. a recent note.
Analysts say a series of aggressive rate hikes by central banks, including the Fed, along with the slowdown in economic growth will keep pressure on the euro while sending investors into the U.S. dollar as safe haven.
The US Federal Reserve is well ahead of Europe in terms of tightening, having raised interest rates by 75 basis points, while indicating further rate hikes will take place this month.
This safe-haven pullback toward the U.S. dollar could become even more extreme if Europe and the U.S. go into recession, Deutsche’s global foreign exchange research chief George Saravelos warned in a note last week.
A situation in which the euro trades below the US dollar in the range of $ 0.95 to $ 0.97 could be “achieved well,” Saravelos wrote, “if both Europe and the US are falling into a (deeper) recession in the third quarter while the Fed is still raising rates. “
This is good news for Americans who plan to visit Europe this summer, but it could mean bad news for global economic stability.