The single currency at a 20-year low against the dollar

But how far will the single currency sink? The euro plunged Monday below parity with the dollar, the lowest in nearly 20 years, caught between a major energy crisis in Europe and, in the United States, a Fed still on the offensive to curb inflation.

Around 8:15 p.m., the euro lost 1.05% to 0.9932 dollars, its lowest since December 2002. The single currency had already fallen below parity for the first time in mid-July.

The specter of a significant economic downturn

The announced closure, for maintenance, of the Nord Stream 1 gas pipeline, which supplies the bulk of Russian gas to Europe, between August 31 and September 2, has further accentuated fears of shortages on the Old Continent, and boosted natural gas prices in Europe. “This increases the risk of a significant economic slowdown by the end of the year” in the eurozone, said Shaun Osborne of Scotiabank.

“The sword of Damocles hanging over Europe is gone to stay there,” warns Kit Juckes, analyst at Societe Generale. Above all, the week threatens to be even more painful for the euro, because “poor PMI indicators on Tuesday could be enough to anchor the euro under one dollar”, he warns.

The ECB in a “very difficult” situation

This development places the European Central Bank in a “very difficult” situation, notes Erik Nelson of Wells Fargo. An increase in its key rate at its next meeting on September 8, expected to be half a percentage point, “would support the euro a little”, “but with the risk of worsening the economic situation” of the zone.

And even by daring to raise another half point as the market predicts, after a similar rise in July, the ECB would not catch up on the Fed, which operators are now seeing rise for a third time in a row. rate of 0.75 percentage point in September.

“People are expecting Fed Chairman (Jerome) Powell to adopt a speech perhaps a little more offensive than in July” during his speech, scheduled for Friday. In addition to the continuation of the tightening, the person in charge could insist on “the probability that inflation remains high for a while, (…) and that the rates remain high for some time as well”, estimates Shaun Osborne. After banking on a possible Fed rate cut during the first months of 2023, the market is only considering it at the end of next year.

All of these uncertainties therefore make it impossible to properly anticipate price trends. Some analysts see the euro slipping even more as the cold season arrives, notably Nomura, which evokes the single currency at 0.95 dollars by October, or even below. But for Shaun Obsorne, “the dollar has already gone very high and we are not convinced that it will go much further in the medium term”.

source site