The euro sank to a 20-year low against the US dollar as investors pared bets on European Central Bank interest-rate increases, adding to bears’ conviction that the common currency will tumble to reach parity with the greenback by the end of 2022.
The single currency fell as much as 1.2 per cent to $1.0298, its weakest level since December 2002. The losses came as money markets trimmed ECB tightening bets after the purchasing managers' index of French services was revised lower on Tuesday, widening the interest-rate differential with the US Federal Reserve.
The euro has dropped more than 9 per cent against the dollar this year as record inflation has escalated the squeeze on households and businesses.
Combined with the fallout from Russia's war in Ukraine, this is hampering the ECB’s ability to raise rates as fast as the Fed.
According to Bloomberg’s options-pricing model, there is now a 60 per cent chance the currency hits parity versus the dollar by the end of the year, up from 46 per cent on Monday.
“Parity is just a matter of time now,” said Neil Jones, head of foreign currency sales at Mizuho.
Traders are confident that the ECB will deliver less than a 140 basis point rate rise this year, down from more than 190 bps about three weeks ago.
They expect policymakers to begin their first tightening cycle in a decade later this month with a 25 bps increase.
The Fed has already raised rates by 150 bps, with markets pricing in an 80 per cent chance of a 75 bps increase at its meeting later this month.
“It is hard to find much positive to say about the euro,” said Dominic Bunning, head of European FX Research at HSBC, who also expects the common currency to trade at parity with the dollar this year.
“With ECB sticking to its line that we will only see a 25 bps hike in July — at a time when others are hiking much faster — and waiting for September to deliver a faster tightening, there is also little support coming from higher yields.”
The losses on Tuesday were compounded by poor liquidity and selling in euro-Swiss franc, according to three Europe-based traders. The euro fell as much as 0.9 per cent against the Swiss franc to 0.99257, the lowest level since 2015.
“The FX market is not back up to full liquidity given [the] US holiday,” said Mr Jones. “Any given size of trade is likely to have a greater impact on market movement.”