The euro fell to a dollar on Tuesday, a level not seen since the year it was launched two decades ago, weighed down by the risk of a cut in Russian gas supplies to the union.
Investors favored the greenback, which is up nearly 14% year-to-date and briefly traded at a dollar to a euro, a high since December 2002, when questions about the brand-new single currency weighed on its shares.
The market is concerned about a major energy crisis in the old continent and doubts about Russia’s restoration of gas flows after a halt for maintenance work on the Nord Stream 1 gas pipeline. This situation is increasing recession fears in Europe.
Energy from Russia “is at the center of the turmoil in Europe,” and Canada’s announcement on Saturday that it would return turbines for the Nord Stream gas pipeline to Germany in a bid to defuse the energy crisis with Russia “is without positive implications,” comments Jeffrey Halley, analyst at Oanda.
On Monday, Russian energy giant Gazprom began ten-day maintenance work on the Nord Stream 1 gas pipeline. Germany and other European countries are waiting to see if gas supplies will resume.
“The key question is whether the gas will come back after July 21. The markets already seem to have made up their minds,” notes Mr. Halley.
For Mark Haefele, an analyst at UBS, a halt to Russian gas supplies to Europe would “cause a recession across the eurozone with three consecutive quarters of economic contraction.”
The European Central Bank (ECB) will therefore find it difficult to tighten monetary policy to fight runaway inflation without worsening the economy.
The US Federal Reserve (Fed) has more leeway to continue raising interest rates as payrolls data released on Friday showed the US economy is holding up better so far.
The crash of the euro could continue.
On Wednesday, inflation data from France, Germany and the United States could fuel investor concerns about divergence between economies on either side of the Atlantic.
“If US inflation is stronger than the market expects, it could benefit the dollar,” said Forex.com analyst Fawad Razaqzada, investors are betting the Fed will have to act even faster to hike rates.
The euro edged up very slightly after hitting a dollar and was trading at $1.0024 around 6:10 am (Quebec time).
“Investors are struggling to break the symbolic parity threshold” and take the euro below that level, said Walid Koudmani, an analyst at XTB.
“This slow pace proves that this is a long-term move of selling the euro and buying the dollar and not market manipulation,” adds Mr. Razaqzada.
The euro is also struggling against the Swiss franc, also a safe haven, falling to 0.9836 Swiss francs, its lowest level since 2015.
And the dollar is also shining against other currencies deemed risk-prone: the pound sterling plummeted to $1.1807, its lowest since March 2020, when the start of the COVID-19 pandemic in Europe amid full Brexit negotiations Currency had pushed back to its lowest level since 1985.