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Euro could slide below dollar parity for first time in 20 years

  • By Al Mayadeen English
  • Source: Agencies
  • 18 May 2022 14:48
4 Min Read

The fall of the single currency is a communal concern that is unlikely to strain the union.

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  • Euro slides below dollar parity for first time in 20 Years.
    Euro slides below dollar parity for the first time in 20 Years.

Europe's single currency has already fallen to a five-year low near $1.03, collapsing from a rush into the greenback as a safe haven from market turbulence and the Ukrainian crisis. As a result, HSBC Holdings Plc and RBC Capital Markets estimate the two will reach parity in 2022.

The euro has already plummeted to a five-year low near $1.03, owing to a rush towards the greenback as a safe haven from market volatility and the Ukrainian crisis. As a result, HSBC Holdings Plc and RBC Capital Markets predict that the two currencies will reach parity in 2022.

“The euro itself is not an attractive currency at the moment,” said Francesco Pesole, a currency strategist at ING Groep NV. While the Dutch bank is keeping its official euro forecast for the next six months at $1.05, Pesole admits the dollar’s strength and market volatility means parity is likely.

Euro in relation to Dollar

To a significant measure, the euro crisis is a result of dollar strength, which has been exacerbated as the Federal Reserve continues to raise interest rates faster than its peers. A new round of global risk aversion, which has knocked the wind out of equities and credit markets, is simply adding fuel to the run into haven currencies.

Read next: EU stocks, oil prices rise, euro at 5-year low against USD

 

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The European economy's prognosis is likewise deteriorating. An ongoing stalemate with Moscow over natural gas supplies to the continent has heightened the likelihood of a significant slowdown. The International Monetary Fund has reduced the currency bloc's growth prediction for 2022 to 2.8 percent.

As a result, the European Central Bank is treading water. It must balance the need for stronger policies to limit record inflation with the danger of economic harm, notably in some of the region's most indebted member countries, such as Italy. While officials may raise interest rates above zero before the end of the year, additional hikes are doubtful.

ECB officials see rate exceeding zero this year

Investors will be watching statements from ECB President Christine Lagarde, as well as the minutes of the bank's April meeting on Thursday, for more signs on thinking in the coming days. Lagarde has joined the chorus of policymakers calling for a rate hike as soon as July.

“I think it’s politically difficult for many in the ECB to sound too dovish, considering that inflation has likely not yet peaked,” said Peter McCallum, a rates strategist at Mizuho International Plc. “Unless we get 50 basis-point hikes being talked about, it’s tough for many of the hawks to surprise the market now.”

Any renewed euro selloff that breaks through the January 2017 low of $1.0341, which was almost reached on both Thursday and Friday, might put the currency up for more losses.

A risk

With the region's bonds being dumped as well, the currency market may begin to factor in eurozone debt problems, according to HSBC Holdings Plc strategists including Dominic Bunning. For the first time since the pandemic's early days, the margin between Italian and German yields surpassed 200 basis points this month.

Not everyone is pessimistic. According to Roberto Mialich, a currency analyst at UniCredit SpA, the euro will rise back above $1.10 in the coming year as the Fed's rate hike cycle slows. He sees a sustained below-parity situation as a tail risk, and only if eurozone GDP slows significantly more than expected.

Read next: Euro slumps amid Ukraine tensions

 

However, as long as risk assets remain fragile, conventional safe havens such as the dollar and the yen will remain popular. Russia's war in Ukraine is also a significant headwind for the euro, especially given the possibility of more delays in gas supplies.

“The euro has already faced more downward pressure than we expected, but we find it hard to see a silver lining for the single currency at this stage,” HSBC strategists wrote in a note, pointing to downward revisions to growth forecasts and upward revisions for inflation. “This is a nasty cocktail for any currency to try to digest.”

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