The energy crisis and offensive Fed are pushing the euro to a 20-year low against the dollar

The euro tumbled below par against the dollar on Monday, the lowest in almost 20 years, caught between a major energy crisis in Europe and a US central bank (Fed) still on the offensive to stem inflation.

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At around 18:15 GMT, the euro lost 1.05% to $0.9932, its lowest level since December 2002. The common currency had already fallen below parity for the first time in mid-July.

The announced closure of the Nord Stream 1 gas pipeline, which supplies most of Russia’s gas to Europe, between August 31 and September 2 for maintenance work has further fueled fears of shortages in the old continent and pushed natural gas prices in Europe into the driven up .

“This increases the risk of a significant economic slowdown by the end of the year” in the eurozone, said Scotiabank’s Shaun Osborne.

“The development of energy prices and the question of supply are both very worrying and that is what is behind the euro’s downward movement,” said Erik Nelson of Wells Fargo.

The UK is also caught up in this crisis and the pound sterling was little better than the euro against the greenback on Monday. It was flirting with its March 2020 level, in the early days of the pandemic, at $1.1760 a pound.

Prior to 2020, the British pound had not fallen below $1.18 since 1985.

In Hungary, which is heavily dependent on Russian supplies, the forint fell to an all-time low against the dollar, at 411 forints to the dollar.

“The sword of Damocles hanging over Europe will stay there,” warns Kit Juckes, an analyst at Societe Generale.

And the week threatens to be even more painful for the euro as “bad PMI indicators on Tuesday could be enough to anchor the euro below a dollar,” he warns.

This development puts the European Central Bank (ECB) in a “very difficult” situation, notes Erik Nelson. A hike in its key interest rate at its next meeting on September 8, which is expected by half a percentage point, would give the euro “a little support” “but with the risk of a worsening economic situation” in the zone.

And even if it dared hike another half-point, as the market is predicting, the ECB, after a similar hike in July, would not catch up with the Fed, whose interest rate hike is now a third consecutive 0.75 percentage point in September.

The difference in pace is reflected in bond yields. The spread between 3-month US Treasury yields and German 1-month Treasury yields was at its highest level in almost three years on Monday.

“People are expecting Fed Chair (Jerome) Powell to make a maybe a little more offensive speech than he did in July,” during his speech, which is scheduled for Friday at the annual meeting of banking centers in Jackson Hole, Wyoming.

As well as continuing tightening, officials could insist on “the likelihood that inflation will remain high for a while longer (…) and that interest rates will also remain high for some time”, estimates Shaun Osborne.

Having priced in a potential Fed rate cut in the early months of 2023, the market is not pricing it in until late next year, helping to prop up the “greenback,” another nickname for the dollar.

Some analysts are expecting the euro to slip even further as cold weather sets in, particularly with Nomura forecasting the single currency to trade at $0.95 or even lower through October.

But for Shaun Obsorne, “the dollar has already gone very high and we’re not convinced it’s going to go much further in the medium term.”

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