Key Takeaways:
- Euro falls below parity to the dollar.
- The implications of the fall could be severe for Europe.
- Dollar rose against the war in Ukraine, and the Fed's interest rate hikes.
YEREVAN (CoinChapter.com) – The Euro traded low against the dollar for the first time since the year 2000, as the exchange rate fell to 0.9903 on Aug 23. The parity was restored on Aug 24. However, experts forecast more headwinds for the European economy.
Euro Dollar Parity Unstable
Luis Costa, the head of CEEMEA strategy at Citibank, told CNBC’s “Squawk Box Europe” on Tuesday that further Euro depreciation is in the books.
Our outlook and our trades and our position on the strategist side are definitely biased towards further euro depreciation from where we are now. This is the primary point of euro vulnerability now.
said Costa.
Meanwhile, there are several factors behind the drop, and energy prices are among the primary triggers. Wholesale gas prices in Europe rose sharply on Monday after Russia announced unscheduled maintenance on its main pipeline to Germany, Nord Stream 1, while heat waves have put additional strain on energy supplies.
Costa also noted that the situation faces an “additional layer of complexity,” considering the tension between China and Taiwan. The latter will hit Europe with a “much higher magnitude when compared to the impact in the States,” stated the expert.
Recession in Europe Underway
Global finance institution ING’s Roelof-Jan Van den Akker agreed with the dire prediction, citing bearish expectations for both Euro and dollar.
[The dollar] broke below the 103.60 support level. That’s a very crucial horizontal support … And I suggest that there’s further downside potential to go. Longer-term target of between $0.80 to $0.75 in the coming months. It confirms there is dollar strength as well as euro weakness.
said the analyst.
The predictions echo concerns that inflation will continue to rise and that a recession in Europe is unavoidable.
Moreover, the psychological impact of the Euro falling below dollar parity can’t be overestimated. Expectations that the economy would see a rebound after turning the corner from the COVID-19 pandemic have been bleak.
Robin Brooks, chief economist at the Institute of International Finance banking trade group, called Europe the “global epicenter of the coming recession.”
If you think Euro at parity is cheap, think again. Euro zone has a trade deficit on a scale never seen before. German manufacturing lost access to cheap Russian energy & thus its competitive edge, even as periphery debt makes ECB tightening impossible. Lots more Euro downside…
commented the economist.
Also read: Biden’s Executive Order to usher in the 3rd great dollar earthquake.
Despite the dollar’s seeming strength, it might not last long against the global recession woes. Moreover, the Fed’s aggressive interest rate hikes might have added insult to Euro’s injury. The scenario is as follows:
The Fed raises rates more than the European Central Bank. Higher interest returns will attract investor money from euros into dollar-denominated investments. Hence, those investors will have to sell euros and buy dollars to buy those holdings. That drives the Euro down and the dollar up.
