Euro Falls Below Parity for the First Time in 2 Decades

Euro Falls Below Parity for the First Time in 2 Decades
U.S. dollar and Euro banknotes are photographed in Frankfurt, Germany, in this illustration picture taken on May 7, 2017. (Kai Pfaffenbach/Illustration/Reuters)
Reuters
7/13/2022
Updated:
7/14/2022

LONDON—The euro dropped below parity against the dollar the first time in almost two decades on Wednesday, 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 specter of recession.

Rich Steinberg, Chief Market Strategist, the Colony Group, Boca Raton, Florida

“Americans should back up the truck if they plan to take a European vacation over the next few years. Also, a strong dollar could start to bring down the 2023 S&P consensus earnings of $250, which has remained stubbornly too high.”

Olivier Konzeoue, Director in the Fx Team, UBP

“We are seeing that parity is acting as a support level at present, but should it break $0.9995 we see room for a move all the way to $0.97 and possibly even $0.95.

“The ECB has one mandate—to deal with inflation. They are already late to the party and are projected to do only 25 basis points next week. They face fragmentation risk with regards to peripheral bonds and also have the issue with the Nordstream 1 gas pipeline which is in shut for maintenance.

“It’s scheduled to last 10 days but that’s the less likely scenario, which will keep the pressure on the euro. Basically, we know it’s all about Russia. The prospect of gas shortages and Europe on the verge of economic crisis is weighing on markets in general.

Roberto Mialich, Fx Strategist, UniCredit

“We expect the euro to steady around the current levels in the next few days after briefly breaching parity.
“Markets will closely watch the next ECB meeting. A credible anti-fragmentation tool will support the single currency. The medium-term outlook remains weak as investors expect the Fed to tighten its monetary policy way more quickly than the ECB.”

Antje Praefcke, Fx Analyst, Commerzbank, Frankfurt

“We might see the euro slip to $0.99 or $0.98. However, that is just an initial move. If we see more news, like for example we see gas flows halted at the end of the month, then we might well see the euro slip to $0.95.

“What does this mean for the ECB? Imported inflation and pressure to do more, but they will want to wait and see what happens to gas flows because the risk of a recession needs to be taken into account in any decisions.

“Parity in itself is not so hugely important—of course it plays a part for imported inflation. But they key question first of all is: Will there be a recession?”

Michael Brown, Head of Market Intelligence, Caxton, London

“The inevitable has finally happened, with the euro breaking beneath parity with the greenback for the first time in two decades.
“With the market increasingly worried about the prospect of a eurozone recession this winter, and with the latest inflation figures likely to give the Fed further cause to maintain their present aggressive stance, further declines look likely, with the common currency far from out of the woods.”

Francesco Pesole, FX Strategist, ING Bank, London

“This is a big psychological 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.”