What awaits the euro after its decline against the dollar

FILE PHOTO: Euro banknotes are shown over US dollar banknotes in this illustration taken on February 14, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

The drop in the euro against the dollar, due to the Ukraine war and growing risks to the European Union’s economy, brought the two currencies to parity for the first time in two decades.

The European single currency fell last Thursday to $0.9952, a level not seen since late 2002, the year it was officially introduced.

But Traders think the euro may recoverTo overcome several obstacles in the coming months.

The first thing to overcome is to avoid the risk of Russian gas supplies being cut off to Europe, which has sent electricity prices skyrocketing, and prompted eurozone countries to reduce some industrial activity.

“If the flow of gas from Russia normalizes, or at least stops declining, after the end of the Nord Stream 1 maintenance shutdown next week, this should to some extent ease market fears of an impending gas crisis in Europe,” Commerzbank told AFP.

Since the Russian gas giant, Gazprom, has warned that it cannot guarantee the proper operation of the pipeline, European countries fear that Moscow will use a technical reason to permanently halt deliveries and put pressure on them.

French President Emmanuel Macron went so far as to say on Thursday that Russia was using energy as a “weapon of war”.

If Nord Stream 1 does not come back again, Stephen Innes, an analyst at SPI Asset Management, warned, “the euro will fall as you will feel economic shock waves around the world because the European energy crisis could lead to a recession.”

European Central Bank wake-up call

“The recession will inevitably mean that the market has become more concerned about retail risks in the eurozone,” added Jane Foley, a currency specialist at Rabobank.

Like other central banks, The European Central Bank (ECB) is trying to avoid flooding the economy by raising interest rates too high.

But he also has to worry about the potential fragmentation of the debt market, with wide variations in loan rates across the eurozone.

The European Central Bank has so far maintained a very loose monetary policy to support the economy, while the US Federal Reserve raised interest rates and promised to continue doing so to counter inflation.

On Thursday, he will announce his monetary policy decision, and indicated that he will raise interest rates for the first time in 11 years.

“If the ECB wants to give the euro a boost, it will have to raise 50 basis points in July and/or indicate that moves of 75 basis points are expected in September,” S&P analysts noted in a note. They added that “faster monetary policy tightening would help stabilize inflation expectations, reducing the risk of further policy tightening.”

Fed slowdown

For the economists at Berenberg, The decline of the euro is due more to the strength of the dollarwhich “has risen strongly against a broad basket of currencies since mid-2021”.

The dollar benefited from the Federal Reserve’s tightening of monetary policy in its attempt to curb inflation, which hit record levels again in June.

“Markets are speculating that the Fed will raise interest rates by 100 basis points instead of 75 at its next meeting on July 27,” Bernenberg points out. “If that is the case, this could further strengthen the dollar.”

UniCredit added: “Towards the end of the year, prospects for lower inflation and a more balanced message from central banks as interest rate cyclical peaks approach should support a return to risk appetite and easing demand for dollar credit.”

If this happens, They say the euro could move away from parity in the final months of 2022.

With information from Agence France-Presse

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