Energy crisis in Europe helps to drive parity between US dollar, euro
For the first time in nearly two decades, the exchange rate between the euro and the U.S dollar is about equal.
The euro dropped to a 20-year low on Monday, approaching parity with the dollar on fears that an energy crisis in the European Union could drag the region into a recession. The euro traded at around $1.007 on Monday afternoon in the U.S, down roughly 15% from the start of the year.
The parity between the two currencies comes as Russia shut off a key pipeline – Nord Stream 1 – carrying gas to Germany for annual maintenance. While the routine work that includes “testing of mechanical elements and automation systems” is scheduled to end on July 21, German officials fear the suspension of Russian gas could last longer than anticipated because of the war in Ukraine.
“Everything is possible, everything can happen,” German economy minister Robert Habeck told Deutschlandfunk radio on Saturday, according to a translation from the Guardian. “It could be that the gas flows again, maybe more than before. It can also be the case that nothing comes.”
The dollar, meanwhile, has been bolstered by growing risk aversion in the U.S.: Investors are fleeing toward the greenback as a safe haven of sorts as the Federal Reserve moves to hike interest rates at the fastest pace since 1994 to curb white-hot inflation. Fed policymakers already approved a 75 basis point hike in June and are expected to do so again at the end of July as they race to cool consumer demand.
The U.S. central bank is raising rates far more aggressively than the European Central Bank, which has also helped to boost the dollar. And while there are recession fears brewing in the U.S., experts believe the odds of an economic downturn in Europe are even higher.
International Monetary Fund Managing Director Kristalina Georgieva said this week that business conditions in the European Union have “darkened significantly” in recent months.
“Indeed this is a heavy cloud hanging over European assets at the moment, and they were among the worst global performers yesterday as the prospect of a chaotic gas situation and recession came closer into view,” Deutsche Bank strategist Jim Reid wrote in a research note last week.