Why the euro hit its lowest level against the dollar


Why the euro hit its lowest level against the dollar
Written by madishthestylebar

The euro at its lowest. The European currency fell below the parity threshold with the dollar on Monday, August 22. The euro lost 0.84%, dropping to 0.9951 dollars, a level not seen since the year it was put into circulation in 2002. The European currency had already fallen below parity for the first time in mid-July. In reality, it is not so much the euro which is falling as the dollar which is rising. War in Ukraine, dependence on Russian hydrocarbons, threat of recession in Europe and tightening of the American Federal Reserve (Fed)… Franceinfo explains why the dollar has fallen in front of the euro, at its lowest since 2002.

Because the energy crisis worries investors

Energy prices are at their highest in Europe. The Old Continent, very dependent on Russian gas, is affected by an energy crisis which has many consequences on the economy. The price of European gas had jumped by more than 20% in one week on Monday to reach 295 euros per megawatt hour (MWh), close to the records recorded during the first days of the war in Ukraine, notes The gallery.

Europe is weakened by its geographical proximity to the war in Ukraine and by its dependence on Russian oil and gas. In this period of uncertainty, the dollar has for several months regained its status as a safe haven, which explains its strengthening against the euro.

In this already tense context, Russia has once again announced that it will have to close the Nord Stream 1 gas pipeline, which supplies the bulk of Russian gas to Europe, between August 31 and September 2. What accentuate the fears of shortage and to take off the prices of natural gas in Europe. “The evolution of energy prices and the issue of supply are both very worrying, and that is what is behind this movement” to the fall of the euro, analyzes Erik Nelson, of Wells Fargo, with AFP.

The European currency is not the only one concerned. The United Kingdom is also caught in this crisis and the pound sterling did little better than the euro on Monday against the greenback. It was flirting with its level of March 2020, in the early days of the pandemic, at 1.1760 dollars for one pound. Very dependent on Russian supplies, Hungary saw the forint fall to its lowest level in its history against the dollar, at 411 forints to the dollar. And the uncertainties are not likely to dissipate any time soon. “The Sword of Damocles hanging over Europe is gone to stay there”warns Kit Juckes, an analyst at Societe Generale at AFP.

Because a risk of recession hangs over Europe

The energy crisis in Europe is also fueling fears of a recession. “This increases the risk of a significant economic slowdown by the end of the year” in the eurozone, said Shaun Osborne, of Scotiabank, to AFP.

One of the consequences of rising energy prices is inflation in Europe. It had started to climb with the recovery of the post-Covid-19 economy, and increased with the start of the Russian invasion of Ukraine. It reached 8.9% in July 2022 in the euro zone. In Germany, she could “exceed 10% in the coming months”warn The echoes. The rise in energy prices caused by the conflict is particularly penalizing the powerful German industry. Growth in Germany remained flat in the second quarter, weighed down by the acceleration of inflation in the wake of the war in Ukraine, which is weighing on purchasing power and industrial activity, according to the German statistical institute Destatis .

Europe’s leading economy is struggling in “a difficult global economic context, with the Covid-19 pandemic, disrupted supply chains, rising prices and the war in Ukraine”Destatis explained in a press release. “Most figures now indicate that we are on the verge of a recession”commented Jens-Oliver Niklasch, an analyst at LBBW Bank.

As winter approaches, the risk of a recession hangs over Germany and, by extension, over Europe. Although its growth forecasts remain positive, the IMF has nevertheless revised them downwards for the euro zone. Its report on the outlook for the world economy forecasts GDP growth of 2.6% in 2022 and 2% in 2023 for the euro zone, below its previous forecasts.

This uncertainty encourages, here again, investors to turn to the dollar. To make matters worse, the dominance of the greenback over the euro forms a vicious circle. The cost of imports increases for Europeans with a less strong currency, in particular that of oil, fixed in dollars. In six months, the rise in crude prices reached 66% in dollars, but 78% in euros, notes Le Figaro. This further increases inflation for households and businesses.

A trend that is here to stay. “After briefly touching parity with the dollar in July, the euro should this time settle permanently below and oscillate until the end of the year between 0.95 and 1, Lee Hardman, a foreign exchange specialist at MUFG Bank, told the Figaro. The fear of a recession in Europe will increase with the approach of winter due to the energy crisis and does not seem to dissipate anytime soon.

Because the Fed raises its interest rates faster than the ECB

The value of the dollar is supported by the monetary policy of the American central bank, the Fed. To contain inflation in the United States, it raises its interest rates. But the European Central Bank (ECB) cannot keep up.

Recession fears in Europe could prevent the ECB from raising interest rates so aggressively. Moreover, the consequences would be diverse for the Member States. A rise in interest rates would weaken countries already in difficulty, raising fears of a new sovereign debt crisis.

This context places the ECB in a situation “very difficult”, notes Erik Nelson, of Wells Fargo with AFP. An increase in its key rate at its next meeting on September 8, expected at half a percentage point, “would support a little” euro, “but with the risk of worsening the economic situation” of the area. Even by daring to raise another half a point, after a similar increase in July, the ECB would not catch up on the Fed, which operators now see raising its rates for a third time in a row by 0.75 points. in September.

The difference in pace is reflected in bond rates. The gap between the yield on three-month US government bonds and those of Germany, for the same maturity, was Monday at its highest for nearly three years. Besides continued tightening, Fed Chairman Jerome Powell may insist on “the probability that inflation will remain high for a while, (…) and that rates will remain high for some time as well”, Shaun Osborne of Scotiabank told AFP. After pricing in a possible Fed rate cut in the early months of 2023, the market is only pricing it in at the end of next year, which is helping support the dollar.

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