New York (CNN Business) – For the first time in 20 years, the exchange rate between the euro and the US dollar has reached parity, which means that the two currencies are equal.
The euro hit $1 on Tuesday, down 12% from the start of the year. Recession fears abound on the continent due to high inflation and uncertainty in energy supplies due to the Russian invasion of Ukraine.
The European Union, which got about 40% of its gas needs through Russian pipelines before the war, is trying to reduce its dependence on Russian oil and gas. At the same time, Russia cut off gas supplies to some EU countries and recently cut off the flow in the Nord Stream pipeline to Germany by 60%.
Now this important part of Europe’s gas import infrastructure has been closed for scheduled maintenance due to the past 10 days. German officials fear it will not flare up again.
Accompanying the energy crisis is an economic slowdown, which has raised questions about whether the European Central Bank will be able to adequately tighten policy to lower inflation. The European Central Bank announced that it will raise interest rates this month for the first time since 2011, as the inflation rate in the euro zone is 8.6%.
But some say the ECB is far behind the curve, and a hard landing is inevitable. Germany posted its first merchandise trade deficit since 1991 last week as general chaos in fuel prices and the supply chain sent import prices skyrocketing.
“Given the nature of German exports, which are sensitive to commodity prices, it remains difficult to imagine that the trade balance could improve significantly from here in the coming months given the expected slowdown in the eurozone economy,” Saxo Bank Currency Strategists wrote. On a recent note.
Investors say a series of steep rate hikes by central banks, including the Federal Reserve, along with slowing economic growth, will continue to pressure the euro and send investors toward the safe-haven US dollar.
The US Federal Reserve is far ahead of Europe in terms of tightening, raising rates by 75 basis points and signaling more rate hikes this month.
George Saravelos, global director of currency research at Deutsche, warned in a note last week that this safe pullback to the US dollar could become more severe if Europe and the US slip into recession.
Saravelos writes that a situation in which the euro is trading below the US dollar in a range between $0.95 and $0.97 could “fine well”, if both Europe and the US find themselves slipping into a (deeper) recession in the third quarter as it continues The Federal Reserve raised interest rates.”
This is good news for Americans planning to visit Europe this summer, but it could spell bad news for global economic stability.