LONDON (Reuters) – The euro dropped below parity against the dollar the first time in almost two decades, as a hawkish U.S. Federal Reserve and growing concern about rising recession risks in the euro area continued to batter the single currency.
The euro started this year on a strong note given a post-pandemic economic recovery. But a conflict between Russia and Ukraine, surging European gas prices and fears that Moscow could cut off supplies completely have hurt the single currency by raising the spectre of recession [L8N2YO49I].
FRANCESCO PESOLE, FX STRATEGIST, ING BANK, LONDON
“This is a big psycological level, a unique moment of big dollar strength. But I would not say it’s a major unforeseen event that shocks the market.
“There is a possibility that after reaching parity, the market could start offloading some dollar positions. However, the overall macro story is very dollar-positive and very euro- negative. The terms of trade shock shows that even parity does not immediately take euro deep into undervaluation territory.
“It will be hard for the ECB to intervene. What it can do is turn more hawkish with verbal intervention, but when recession fears weigh on the outlook, there is only that much they can do and surprising markets on the hawkish side is not easy. The global recession story is driving markets and the euro zone in a more dangerous situation than others.”
PETER MCCALLUM, RATES STRATEGIST, MIZUHO, LONDON
“I think the market is more worried about the demand side rather than the FX angle, but it does mean the ECB on net need to do more, but the euro is weakening because the growth outlook is weakening as well. Net net that should be disinflationary rather than inflationary.”
“I think (ECB will) say the similar sort of things. I don’t think they want to react too much because it might send the wrong sort of signals. I suppose the parallel would be the BoJ not necessarily wanting to change policy with what’s going on there. I wouldn’t expect too much change of tone.”
“I see FX being driven more by the growth outlook and that’s probably driving inflation expectations more so than weaker FX.”
DIRK SCHUMACHER, HEAD OF EUROPEAN MACRO RESEARCH AT NATIXIS, FRANKFURT
“Parity is largely symbolic, but at the current juncture, a very weak euro is not helpful for inflation.”
“It also shows that Fed is more important for the exchange rate rather than the ECB at the moment,” adding that while the ECB shouldn’t target the exchange rate explicitly they should be paying more attention to it given the inflationary backdrop.
NEIL JONES, HEAD OF FX SALES AT MIZUHO, LONDON
“Alarm bells are being sent off around the world in the foreign exchange market to sell euro against the dollar.”
“The euro is moving lower through parity on the expectation that interest rate differentials are set to remain between the ECB and Fed and the energy supply crisis is very much in play.”
“The energy crisis (is) not going to go away any time soon, particularly for the likes of Germany.”
“I expect the downside price acceleration to continue and we print $97.5 in the near term.”
“This move in euro-dollar through parity is likely to remain intact.”
(Reporting by the EMEA Markets Team; Compiled by Saikat Chatterjee)
