Battered euro edges closer to parity as dollar runs rampant

NEW JERSEY (BLOOMBERG) – Europe’s common currency edged closer toward parity with the US dollar Monday (July 11) as energy concerns and the risk of recession weighed on the outlook for the euro area, while risk aversion fueled a broad rally in the greenback.

The euro dropped as much as 1.3 per cent to US$1.0053, eclipsing its low from last week. The last time it was this low was back in 2002. The Bloomberg Dollar Spot Index jumped as much as 1.1 per cent.

The currency’s downward spiral has been swift and brutal, given it was trading around US$1.15 in February. A string of increasingly-large Federal Reserve interest-rate hikes has supercharged the dollar, while Russia’s invasion of Ukraine has worsened the outlook for growth in the euro zone and pushed up the cost of its energy imports.

Shorts on the common currency were one of the most popular trades among foreign-exchange professionals last week.

The euro position saw the biggest weekly change compared to other major currencies, with accounts adding US$769 million to net short bets totaling US$2.2 billion, the most since late November, Scotiabank strategists Shaun Osborne and Juan Manuel Herrera Betancourt wrote in a report Monday.

George Saravelos, global head of FX research for Deutsche Bank, told Bloomberg Surveillance Monday he could see the euro moving under parity, especially in the scenario of a “complete gas shutoff” from the Nord Stream 1 pipeline.

The bank is pricing the euro to move in between a range of 0.95 to parity against the dollar, he said. “I really wouldn’t say 0.95 would be unreasonable,” Saravelos said. “Even if this gas returns in terms of full flow after the maintenance period, the (risk) premium is unlikely to go away. And I think that’s a critical thing that’s changed over the past few weeks.”

Citigroup analyst Tom Fitzpatrick said he was “going all-in” on shorting the euro versus the greenback, pricing a put on the euro-dollar pair at 0.95.

Still, some strategist were less sanguine about the dollar and the euro’s near-term trajectory.

“It’s hard to argue against owning the US dollar with such an aggressive Fed posture and the myriad of issues in Europe,” said Brad Bechtel, foreign-exchange strategist at Jefferies. “Having said that it feels like EUR/USD is oversold on many technical measures and parity was such a target for so many people in the market that it wouldn’t surprise if we see a lot of profit taking down here and a short term bounce.”

The dollar’s strength was broad-based Monday, with other currencies falling as much or more than the euro. The Australian dollar led declines among Group-of-10 counterparts, while the euro fell inline with peers from Norway and New Zealand.