The exchange rate between the euro (EUU) and the US dollar has reached parity for the first time in 20 years. This means that the two currencies are worth the same amount of money.
The euro was worth $1 on Tuesday, which is about 12% less than it was at the start of the year. As a result of Russia’s invasion of Ukraine, there are high prices and a lot of uncertainty about the energy supply. This has made many people worry about a recession on the continent.
The European Union is trying to get less of its oil and gas from Russia. Before the conflict, about 40% of the EU’s gas came from Russia. Also, Russia has cut the flow of gas through the Nord Stream pipeline to Germany by 60%, which hurts the supply of gas to several EU countries.
Now, that important part of Europe’s gas import system has been shut down for ten days so that maintenance can be done. German officials are worried that it might not be turned back on.
When a bad economy and an energy crisis happen at the same time, it makes people wonder how well the European Central Bank can tighten monetary policy to lower inflation. The ECB said that it would raise interest rates this month for the first time since 2011 because the inflation rate in Europe is 8.6%.
But some people say that the ECB is very out of touch with the times and that a hard landing is almost certain. Last week, the price of imports went up a lot because gasoline prices went up and there were problems with the supply chain as a whole. This caused Germany to have its first goods trade deficit since 1991.
Given that the economy in the eurozone is expected to slow down in the coming months, foreign exchange strategists at Saxo Bank don’t see the trade balance getting much better. In a recent note, they said, “Given that Germany’s exports are sensitive to changes in commodity prices.”
Analysts think that the US dollar will become a safe haven for investors because central banks, especially the Fed, have been raising interest rates quickly and the economy is growing slowly. This will keep putting strain on the euro.
The US Federal Reserve has raised interest rates by 75 basis points and said that more rate hikes will happen this month. In terms of tightening, this puts the US far ahead of Europe.
In a report released last week, Deutsche Global Head of FX Research George Saravelos warned that if both Europe and the US go into a recession, this rush to the US dollar as a safe haven could get a lot worse.
Saravelos said that if both Europe and the US fall into (deeper) recessions in Q3 while the Fed is still raising interest rates, “then a scenario could happen where the euro trades below the US dollar in the range of $0.95 to $0.97.”
This is great news for Americans who want to travel to Europe this summer, but it could be bad news for the world economy.