Euro Eyes Void Below Parity Versus Swiss Franc on Stagflation Shock

By Reuters
Reuters
Reuters
March 7, 2022 Updated: March 7, 2022

LONDON—The euro briefly sank below parity versus the Swiss franc for the first time in seven years on Monday and held at a 22-month low versus the dollar as soaring oil prices stoked fears of a stagflationary shock that could hammer Europe.

The conflict in Ukraine and harsh international sanctions on Moscow have sent Russian assets tumbling while prices of the country’s exports such as precious metals, oil, and gas have soared at a time when the global economy was already grappling with inflationary pressures.

Europe is the most vulnerable as it imports as much as 40 percent of its natural gas consumption from Russia and the single currency has become increasingly correlated with oil prices—the higher oil climbs, the more the euro falls as investors fret about higher inflation and the blow to the economy.

In early London trading on Monday, the euro was down as much as 0.5 percent to $1.0874, within striking distance of a low of $1.0822 hit in Asia trade, its lowest since May 2020.

It is down almost 4 percent since Russia began what it calls a “special military operation” in Ukraine and is not far from testing its 2020 trough of $1.0636.

Oil prices soared again on Monday as the risk of a U.S. and European ban on Russian products and delays in Iranian talks sent prices soaring to the highest levels since 2008.

“This is fuelling demand for the dollar and Swiss franc this morning,” said an FX strategist at a European Bank in London.

“The melt-up in commodity prices ramps up the risk of a stagflationary shock for the euro zone and complicates the policy outlook for the ECB.”

According to Goldman Sachs, a sustained $20 oil rise shock will lower real economic growth in the euro area by 0.6 percent and by 0.3 percent in the United States. But in a more adverse scenario if Russian gas shipments via Ukraine are curtailed, then euro area GDP could fall by as much as 1 percent from gas alone.

The euro also fell to a 15-month low of 124.39 yen and touched its lowest since mid-2016 against the pound at 82.01 pence. Against the Aussie, the euro has lost more than 10 percent over about a month.

Russia’s military will hold fire and open humanitarian corridors in several Ukrainian cities on Monday, the Defence Ministry said, after fighting halted weekend evacuation efforts and civilian casualties from Russia’s invasion mounted.

By Saikat Chatterjee

Reuters