Euro touches parity with the dollar for the first time since 2002

Archivo – 21 February 2022, Hessen, Frankfurt_Main: A performer dressed as a «Eurolino» in the form of a one-euro coin on legs crosses a street in front of the temporary headquarters of the German Federal Bank (Deutsche Bundesbank) in Frankfurt during fil – Frank Rumpenhorst/dpa

The euro continued to weaken against the dollar on Tuesday, reaching parity between the two currencies for the first time since 2002, weighed down by growing fears of a recession in the euro zone and the different pace of normalization of the monetary policies of the respective central banks.

Thus, after learning of the substantial worsening of German investor confidence, according to data from the Leibniz Center for European Economic Research (ZEW), the euro-dollar exchange rate briefly reached the level of equivalence, after almost twenty years in which one euro had always been worth more than one dollar.

However, after briefly falling to the parity level, the euro rebounded slightly to trade at 1.0066 dollars after the close of the Old Continent’s markets.

So far this year, the euro has accumulated a depreciation of almost 15% against the dollar as a result of fears that the eurozone could end up in recession due to the impact of the war in Ukraine on prices and markets, as well as the early start of the US Federal Reserve’s (Fed) tightening of its monetary policy compared to the European Central Bank (ECB).

In fact, while the ECB has announced that it will undertake its first rate hike since 2011 next week, with a hike of 25 basis points, the Fed began the normalization of its monetary policy last March, with a hike of 25 basis points, followed by hikes of 50 and 75 basis points, respectively, in the following two meetings.

In this regard, Morganne Delledonne, head of investment strategy for Europe at Global X, warns that with parity with the US dollar the eurozone «faces headwinds with higher imported inflation, while US companies gain purchasing power.»

Thus, the eurozone and UK balances of payments are deteriorating and the risk of recession is increasing in the region, reinforcing the strength of the dollar against sterling and the euro.

For its part, Ebury’s research team believes that concerns about global recession are somewhat overdone and that strong labor markets, high excess savings accumulated during the pandemic and targeted fiscal programs should support consumer spending and avoid technical recessions in most cases.

In any case, they believe that as long as there remains a divergence in gas prices on both sides of the Atlantic, investors are likely to continue to favor the dollar in the short term, so further moves below parity cannot be ruled out and warn that a total disruption of gas supplies to Europe by Russia «would pose a significant risk to EUR/USD».

«Going forward, it will be interesting to see how the ECB reacts to the latest euro depreciation,» the Ebury analysts note, as a weaker euro has inflationary implications, so policymakers may opt to raise interest rates more aggressively to try to help the currency, assuming they can convince markets that their new anti-fragmentation tool will actually work.

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