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Euro slumps to parity with dollar amid recession fears on Continent

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The dollar is currently strong against the Euro and sterling (Chris Radburn/PA) (PA Archive)
The dollar is currently strong against the Euro and sterling (Chris Radburn/PA) (PA Archive)

The Euro touched parity with the dollar today for the first time in 20 years as financial markets bet on a Continent-wide recession.

With inflation biting and fears growing that the European Central Bank (ECB) is not willing to move quickly enough to control it, money dealers are switching into the dollar.

At its lowest point the European currency was down 0.64 of a cent at exactly $1.00 although it later recovered some of the lost ground to stand at $1.0027.

Matthew Ryan, head of market strategy at global financial services firm Ebury, said: “After many weeks of speculation, the euro has finally dropped to parity against the US dollar for the first time in two decades.

“We think that heightened recession concerns have largely been to blame for the recent sell-off, with markets piling into the safe-haven US dollar for fears that the sharp increase in inflation worldwide will weigh on global growth in the second half of 2022.”

The pound is also under pressure. Today it fell to a fresh two-year low, just below $1.1850.

The fall in the value of the European currency makes it more expensive for the eurozone to buy oil and other energy supplies typically priced in dollars.

Central banks, the ECB and the Bank of England (BoE) in particular, are being criticised for failing to raise interest rates quickly enough to stem inflation.

Jeremy Stretch at CIBC Capital Market, said: “The ECB is in a very, very difficult position. You could argue that the ECB has been rather late to the party both in terms of ending their bond purchases but also considering monetary policy tightening.”

Some are calling for an emergency meeting of the ECB to increase rates before inflation, at 8.6% in the eurozone, gets truly out of control.

The ECB is the only major central bank that has yet to put up interest rates since the pandemic. It is worried that Russia will cut gas supplies on a permanent basis, which in turn might fragment the EU.

Walid Koudmani at financial brokerage XTB, said: “Energy prices in Europe spiked as gas flows were being limited and now there is a real risk of complete halt to gas supply from Russia as tensions continue to escalate and after the “temporary” shutdown of Nordstream 1.

“This would most likely lead to a recession on the continent, especially in gas-dependent countries like Germany.”

Neil Wilson, chief market analyst at Finalto, said: “When does the ECB act – fragmentation risks or not? The ECB is fiddling while the currency burns, causing worse inflation and more misery for the population. Time for an emergency inter-meeting hike to show they are serious – the market just doesn’t believe in the ECB anymore.

The weakness of the pound and the Euro is bad for exports but good for tourism.

James Hughes, chief market analyst at Scope Markets, said. “It’s not so great if you plan to go on holiday or you’re buying goods priced in dollars, everything from oil and gold to corn, coffee and lumber.”

With the UK government in turmoil, some think the pound itself could go to parity with the dollar.

Hughes said: “A few years ago, the pound reaching parity with the dollar would have seemed fanciful, but in this new economic world created by the pandemic, with higher energy costs exacerbated by the conflict in Ukraine, it seems that any outcome is a distinct possibility.”

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