Photo by Ibrahim Boran on Unsplash 

This week, the euro fell below $1.02, continuing its decline to new 20-year lows and eventual parity with the US dollar.

The euro fell as low as $1.0165 in Europe on Wednesday afternoon before recovering somewhat to hover just above the $1.02 barrier on Thursday morning.

The eurozone shared that currency has been steadily declining as fears of a recession grow. It was fueled by increased uncertainty about the bloc’s energy supply. Moreover, Russia is threatening to limit gas supplies to the EU.

The possibility of an economic downturn raises the question of whether the European Central Bank will be able to tighten monetary policy sufficiently to contain record-high inflation.

In a note issued Wednesday, Deutsche Bank noted that the stress points extend beyond the German natural gas shortfall to the larger European energy market, as indicated by France’s EDF announcing more electricity cuts on Wednesday morning.

The United States is entering a technical recession. Hence, “safe-haven” moves toward the US dollar may become much more dramatic. This will put further negative pressure on the EUR/USD trade.
 

Hope For the US dollar

One significant factor that might reverse the strengthening of the US dollar is a signal that the Fed is approaching a prolonged pause in its monetary tightening cycle, allowing for the release of some of the risk premium baked into the greenback. The DXY U.S. dollar index is up more than 11% year to date. It was the last trading slightly below the 107 level.

The bleak forecast for the European economy comes as the European Central Bank (ECB) confirmed its intention to raise interest rates for the first time since 2011, with eurozone inflation at a record high of 8.6 percent.

Central banks around the world are in a bind as they try to contain inflation without exacerbating economic slowdowns. The data suggest that slowdowns are on the horizon. The Fed has already begun to tighten. It raised its benchmark rate by 75 basis points in June while drastically lowering its growth forecast for 2022.

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