The euro continued to trade below parity with the US dollar on Tuesday, hitting its lowest level in 20 years overnight after fluctuating yesterday amid growing fears over a recession.
The single currency, which came into physical circulation in 2002, fell to $0.9910 Tuesday morning, but pared some losses and was trading at 0.9987 by 5.51pm UAE time.
“Increasing risks to the supply of natural gas from Russia to Europe are darkening the economic outlook,” said Emirates NBD economists Edward Bell and Daniel Richards.
The euro previously fell to below parity with the greenback in early July and has dropped about 12.8 per cent against the dollar this year as households and businesses are squeezed by record inflation.
In the euro area, annual inflation was 8.9 per cent in July 2022, up from 8.6 per cent in June 2022 and 8.1 per cent in May 2022, according to Eurostat, the statistical office of the EU.
“Europe’s recession is a foregone conclusion, especially as the risks of disruptions for energy supplies remain elevated,” said Edward Moya, senior market analyst for the Americas at Oanda.
“Maintenance [of] Nord Stream 1 is a big risk for Europe as no one knows when and how much supplies will come back online.”
The key pipeline is expected to be suspended for a few days between August 31 and September 2.
On Tuesday, S&P Global's flash composite Purchasing Managers' Index showed that the downturn in Germany's private sector economy deepened in August.
The gauge for Europe's biggest economy fell to 47.6 in August from July's final reading of 48.1, the fastest fall in business activity since June 2020, reflecting a deepening decline in service sector activity and a continued reduction in manufacturing production volumes.
Naeem Aslam, chief market analyst at Avatrade, said traders are betting that the US Federal Reserve Bank is going to stay on a hawkish monetary policy path, with interest rates in the US expected to continue moving higher, which the European Central Bank is unlikely to match due to the slowing economic activity in the eurozone.
The US central bank raised interest rates by 75 basis points in its past two meetings and is expected to do so again when it meets from September 20 to September 21.
“When we look at the dollar against the euro, the strength of the dollar index becomes even more prominent. This is because euro is the currency that is getting battered by traders as they believe that the eurozone is going to face a lot more difficult time and recession is not avoidable here,” said Mr Aslam.
“This is the reason that we saw the euro/dollar dropping to its fresh lowest of this year and below parity.
“Given the fact the euro/dollar is sitting at a level that we have not seen for over a decade, it seems like that traders do not have the stomach to take the other side of the trade, and that is buying the Euro.
“Most believe that it is a losing trade, and this has left the Euro in a free fall.”
The weakness in the euro also spilled over into other markets, with sterling falling against the greenback to 1.1730 Tuesday morning, before gaining some ground to 1.1835 at 5.51pm UAE time.
The British pound is down about 13 per cent against the dollar since the start of the year.
UK inflation will almost double to 18.6 per cent in January 2023 — its highest rate in half a century — as Europe’s energy crisis leads to British bills becoming prohibitive for many consumers, Citi economists have projected.
Last month, CPI inflation struck a 40-year high of 10.1 per cent, with the Bank of England projecting a further rise to above 13 per cent in October before a decline.
While Britain is not in the eurozone, its privatised energy network leaves it particularly vulnerable to rising gas prices.
Citi forecasts that inflation will jump to 14.8 per cent in October as energy bills surge for UK households.
It said inflation would accelerate after last week's 25 per cent rise in UK gas prices and 7 per cent rise in UK electricity prices.