The euro slid to a fresh 20-year low on Monday, falling below 96 cents against the US dollar ― the steepest decline in two decades ― after the rise of a far-right party in Italy's election rattled investor confidence.
The single currency, which came into physical circulation in 2002, slumped to $0.9550 against the greenback, before rising again. It was trading at $0.9613 at 9.21pm UAE time.
The euro has been trading below or near parity since mid-August amid a historic energy crisis in Europe compounding the effects of surging inflation. The currency has dropped by more than 15 per cent against the dollar this year.
Giorgia Meloni, who heads the far-right Fratelli d'Italia (Brothers of Italy) party, could become Italy's first female prime minister.
Ms Meloni has campaigned on an anti-European platform and her coming to power would mark the first far-right-led government since the Second World War.
The elections took place on Sunday after the collapse in July of Mario Draghi’s government, which had restored Italy's influence and credibility. His resignation prompted Italian bonds yields to rise as prices fell.
"The euro has been shattered this morning," said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.
The rise of Ms Meloni and her right-wing alliance with Matteo Salvini's League party and Silvio Berlusconi’s Forza Italia was "the terrible consequence of the pandemic, the war and the energy crisis", Ms Ozkardeskaya said.
The euro "will certainly remain under pressure as the Italian yields will likely detach from the rest of the eurozone and run toward the north. The wider yield spread between Italian and German bonds will likely continue pressure the euro lower", she said.
"As a result, the European Central Bank should get more aggressive on its rate policy to stop the euro’s crumbling. But it may not get the euro’s back fast enough to avoid inflation spiral higher."
Monetary tightening by central banks around the world 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.
Italy has, as of April, about €2.75 trillion ($2.65tn) of sovereign debt, the world's third largest after the US and Japan. It faces higher debt costs as the ECB raises interest rates.
"Fiscal policy under Italy’s next government will have to adapt to higher interest rates and the energy crisis if public debt is to be reduced," Fitch Ratings said in a new report this month.
Fitch estimates that if 10-year sovereign bond yields stay close to 4 per cent, higher primary balances would be needed to keep the debt-to-gross domestic product ratio on a downward path. If yields remain at about 4 per cent, debt would remain stable at about 150 per cent of GDP.
The ECB raised its key interest rates by an unprecedented 75 basis points on September 8 and indicated further increases were coming as Europe is likely to slide into a recession.
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.
Weak economic indicators and the anticipation of a right-wing win in Italy's polls piled pressure on the currency and markets on Friday.
The EuroStoxx index fell by 2.3 per cent on Friday. It is down by about 23 per cent this year.
The release of the eurozone purchasing managers index (PMI) on Friday showed that business conditions deteriorated further in September.
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.