The euro fluctuated around $1.004 during this Monday, down around 12% since the start of the year. Recession fears on the continent are rife, fueled by high inflation and uncertainty in energy supplies caused by Russia’s invasion of Ukraine.
The European Union, which before the war received about 40% of its gas through Russian pipelines, is trying to reduce its dependence on Russian oil and gas. At the same time, Russia has reduced gas supplies to some EU countries and recently cut the flow on the Nord Stream gas pipeline to Germany by 60%.
This critical piece of gas import infrastructure in Europe has now been closed for scheduled maintenance for the past 10 days. German authorities fear it cannot be turned on again.
The energy crisis is accompanied by an economic slowdown, which has cast doubt on whether the European Central Bank can adequately tighten policy to reduce inflation. The ECB has announced that it will raise interest rates this month for the first time since 2011, as the euro zone’s inflation rate stands at 8.6%.
But some say the ECB is far behind the curve, and a hard landing is almost inevitable. Germany recorded its first trade deficit in goods since 1991 last week as fuel prices and general supply chain chaos significantly boosted the price of imports.
“Given the nature of Germany’s exports, which are sensitive to commodity prices, it remains difficult to imagine that the trade balance could improve significantly from here in the coming months, given the expected slowdown in the eurozone economy,” currency strategists wrote. from Saxo Bank in a recent note.
A series of aggressive interest rate hikes by central banks including the Fed, along with slowing economic growth, will keep pressure on the euro as they drive investors to the US dollar as a safe haven, analysts say.
The US Federal Reserve is well ahead of Europe in the tightening, having raised interest rates by 75 basis points, indicating more rate hikes to come this month.
This safe haven for the US dollar could become even more extreme if Europe and the US slip into recession, Deutsche’s global head of FX research George Saravelos warned in a note last week.
A situation where the euro is trading below the US dollar in the range of $0.95 to $0.97 could be “well achieved”, Saravelos wrote, “if both Europe and the US find themselves sliding into a recession (deeper) in the third quarter, while the Fed is still raising rates.”
That’s good news for Americans planning to visit Europe this summer, but it could spell bad news for global economic stability.
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