Nueva York (CNN Business) — For the first time in 20 years, the exchange rate between the euro and the US dollar is almost the same: the two currencies are less than a cent away from reaching parity.
The euro hovered around $1,007 on Monday morning, down nearly 15% from the start of the year. Recession fears on the continent abound, fueled by high inflation and uncertainty in energy supplies caused by the Russian invasion of Ukraine.
The European Union, which received regarding 40% of your gas through Russian gas pipelines before the war, it is trying to reduce its dependence on Russian oil and gas. At the same time, Russia has reduced gas supplies to some European Union countries and recently cut the flow of the Nord Stream gas pipeline to Germany by 60%.
Now that critical piece of Europe’s gas import infrastructure has been shut down for scheduled maintenance that is scheduled to last 10 days. The German authorities fear that it may not be re-ignited.
The energy crisis is accompanied by an economic slowdown, which has sown doubts regarding whether the European Central Bank can adequately tighten its policy to reduce inflation. The ECB announced that it will raise interest rates this month for the first time since 2011, as the eurozone’s inflation rate stands at 8.6%.
But some say the ECB is far behind and a hard landing is almost inevitable. Germany last week posted its first goods trade deficit since 1991, as fuel prices and general supply chain chaos pushed up the price of imports significantly.
“Given the nature of German exports, which are sensitive to commodity prices, it remains difficult to imagine that the trade balance might improve significantly from here in the coming months, given the expected slowdown in the eurozone economy. wrote currency strategists at Saxo Bank in a recent note.
A series of aggressive interest rate hikes by central banks, including the Federal Reserve, coupled with slowing economic growth, will keep pressure on the euro and have investors looking to the US dollar as a safe haven. analysts say.
The US Federal Reserve is far ahead of Europe when it comes to tightening interest rates, as it has increased by 75 basis points and has indicated that this month there will be more increases.
This safe haven in the US dollar might become even more extreme if Europe and the US slip into recession, Deutsche Global head of currency research George Saravelos warned in a note last week.
Saravelos estimates that a scenario in which the euro trades below the US dollar in a range of 0.95 to 0.97 dollars “might occur”, “if both Europe and the US find themselves slipping into a recession (more deep) in the third quarter as the Fed continues to raise rates.
This is good news for Americans who have plans to visit Europe this summerbut it might be bad news for global economic stability.
