The exchange rate between the euro (EUU) and the US dollar has reached parity, which means the two currencies are now equal in value, for the first time in 20 years.
On Tuesday, the euro was worth $1, down around 12% from the year’s beginning. High prices and the uncertainty surrounding the energy supply brought on by Russia’s invasion of Ukraine have fuelled widespread fears of a recession on the continent.
The European Union is working to lessen its reliance on Russian oil and gas, which accounted for about 40% of its gas supply prior to the war. In addition, Russia has reduced the flow of the Nord Stream pipeline to Germany by 60%, reducing the gas supply to some EU nations.
Now that crucial component of Europe’s gas import infrastructure has been shut down for ten days owing to planned maintenance. Officials in Germany are worried that it might not be turned on again.
When an economic slowdown is combined with an energy crisis, it raises questions about how effectively the European Central Bank can tighten monetary policy to reduce inflation. As the European inflation rate stands at 8.6%, the ECB indicated that it will raise interest rates this month for the first time since 2011.
However, some contend that the ECB is much behind the times and that a hard landing is all but certain. The price of imports surged dramatically last week as a result of rising gasoline prices and general supply chain disruption, which led to Germany recording its first goods trade deficit since 1991.
The trade balance is unlikely to improve significantly from here in the coming months given the anticipated slowdown in the eurozone economy, according to foreign exchange strategists at Saxo Bank. “Given the nature of Germany’s exports, which are commodity-price sensitive,” they wrote in a recent note.
Analysts predict that the US dollar will become a shelter for investors as a result of a string of aggressive interest rate increases by central banks, notably the Fed, and slowing economic growth. This will continue to put pressure on the euro.
The US Federal Reserve has increased interest rates by 75 basis points and has signaled that additional rate rises will occur this month, placing it far ahead of Europe in terms of tightening.
In a note last week, Deutsche Global Head of FX Research George Saravelos cautioned that this safe-haven flight to the US dollar could become much more acute if both Europe and the US experience a recession.
If both Europe and the US find themselves sliding into (deeper) recessions in Q3 while the Fed is still raising interest rates, Saravelos wrote, “then a situation where the euro is trading below the US dollar at a range of $0.95 to $0.97 might possibly be reached.”
That’s excellent news for Americans who want to travel to Europe this summer, but it could be bad news for the stability of the world economy.