The euro slid to a new 20-year low on Friday, trading below 97 cents against the US dollar, the steepest decline in two decades as the energy crisis in Europe compounds the effects of surging inflation and a potential win by a right-wing party in Italy's coming polls rattles investor confidence.
The single currency, which came into physical circulation in 2002, slumped to $0.9690 against the greenback.
The euro has been trading below or near parity since mid-August and has dropped about 15 per cent against the dollar this year.
It has been dragged down by record-high inflation, low consumer confidence and the energy crisis amid a face-off between Europe and Russia over Moscow's war in Ukraine.
The collapse in July of Mario Draghi’s government, which had restored Italy's influence and credibility, and the coming polls this Sunday may bring to power a right-wing party that has campaigned on an anti-EU platform.
The euro "remains under pressure ahead of the Italian election ... the polls give more chance for a right-wing win, as the right wing could join forces, with Berlusconi back on headlines, while the left’s inability to cooperate gives them no chance of winning this", said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
"As a result, the far-right Fratelli d’Italia party is expected to win a majority of the vote and the vote will be a major political shift for Italy – a pivotal country for the EU and not toward the ‘right’ direction."
On Thursday, European bonds weakened with the 10-year bond yield gaining 7 basis points to 1.958 per cent, while the 10-year French bond yield gained 8 bps to 2.517 per cent.
Monetary tightening by central banks globally to tame inflation and a strengthening US dollar that has reached a record high this year has also put pressure on the euro and other major currencies.
"We think the dollar bull market is not over yet," said Mark Haefele, the chief investment officer at UBS Global Wealth Management.
"The US is in the singular position of having both high inflation and more resilient economic growth than some of its peers, meaning the Fed has both the cause and the licence to increase interest rates further and faster than other major central banks, expanding the US dollar’s interest rate advantage.”
UBS expects the euro to weaken relative to the US dollar and hold a least preferred stance on the British pound, which hit a 37-year low against the greenback on Friday to trade at $1.0850. The currency has lost about 20 per cent of its value against the greenback this year.
Critics have said the European Central Bank was too slow to act in fighting soaring inflation levels and was playing catch up given weak economic indicators.
The release of eurozone purchasing managers index (PMIs) on Friday showed that business conditions deteriorated further in September, piling on more pressure on the currency.
The S&P Global flash eurozone composite PMI fell to a 20-month low, sliding to 48.2 from 48.9 in August. This is the third consecutive reading below the 50 mark that separates growth from contraction. A reading below 50 indicates deteriorating conditions.
The euro area annual inflation rate was 9.1 per cent in August 2022, up from 8.9 per cent in July. A year earlier, the rate was 3.0 per cent. EU annual inflation was 10.1 per cent in August 2022, up from 9.8 per cent in July.
The ECB raised its key interest rates by an unprecedented 75 bps on September 8 and indicated further increases are coming as Europe is likely to slide into a recession.
Earlier this month, the Institute of International Finance said it expected the euro's decline against the US dollar to continue amid record inflation, an energy crunch in Europe and a looming recession.
“Markets are increasingly focused on recession ... it is unlikely that ECB hiking will prevent the euro from falling further, not least since speculative positioning remains close to flat for the single currency. The euro is, therefore, likely to keep falling,” the IIF said.
The eurozone area is not expected to avoid a recession, given the deterioration in economic indicators, with growth estimated at 1 per cent in 2022, the IIF said.
It said the sharp deterioration in the eurozone trade balance reflected the immediate hit from the large rise in energy prices, and that the bloc's reliance on cheap Russian energy required “a retooling of the eurozone growth model, [which] will take time and weigh on growth in coming years”.