First Time In 20 Years, The Euro And Dollar Are Within A Half-Cent Of Parity

The euro (EUU) and the US dollar are very close to having the same exchange rate for the first time in twenty years; the difference between them is less than one cent. This marks the first time in twenty years that this has occurred.

On Monday afternoon, the euro traded at a rate of approximately $1.004, representing a loss of approximately 12 percent since the beginning of the year. As a result of Russia’s invasion of Ukraine, many people are concerned that the continent could experience a recession. This concern is being fuelled by high inflation as well as uncertainty regarding the availability of oil.

Before the conflict, the European Union received almost 40 percent of its gas through Russian pipelines. Currently, the EU is making an effort to lessen its reliance on oil and gas imported from Russia. At the same time, Russia has reduced the amount of gas it sends to a number of nations in the European Union, and only recently, it reduced the amount of gas flowing via the Nord Stream pipeline that goes to Germany by sixty percent.

Now that vital component of Europe’s gas import infrastructure has been taken offline for the maintenance work that is expected to take place over the next ten days. The German authorities are concerned that it may never be turned back on again.

Due to the fact that the energy crisis coincides with an economic downturn, concerns have been raised regarding the ability of the European Central Bank to sufficiently tighten monetary policy in order to bring down inflation. Because the inflation rate in the eurozone is currently at 8.6 percent, the European Central Bank (ECB) has indicated that it will raise interest rates this month for the first time since 2011.

However, there are many who believe that the ECB is much behind the curve and that a difficult landing is virtually unavoidable. Last week, Germany reported its first trade deficit in goods since 1991. This was caused by a huge increase in the price of imports as a result of rising gasoline prices and general instability in the supply chain.

According to market analysts, a string of aggressive interest rate hikes by central banks, notably the Federal Reserve, coupled with weakening economic growth would keep pressure on the euro while moving investors toward the United States dollar as a safe haven.

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After increasing interest rates by 75 basis points and hinting that additional rate rises will follow this month, the Federal Reserve in the United States is much ahead of Europe in terms of tightening.

In a report that was published last week, Deutsche Global Head of FX Research George Saravelos issued a warning that this flight towards the US dollar as a safe haven may become much more acute if both Europe and the US were to face a recession.

According to what Saravelos stated, a scenario in which the euro trades below the US dollar in a band of $0.95 to $0.97 might “well be reached” “if both Europe and the US find themselves slip-sliding into a (deeper) recession in Q3 while the Fed is still raising rates.”

This is excellent news for those people in the United States who have trips planned for Europe this summer, but it might not be so good for the economic stability of the world.