The euro finally, after many attempts fell below parity against the dollar on Wednesday for the first time in almost two decades, as growing concern about rising recession risks in the eurozone continued to weigh heavily the currency.
The European single currency started this year on a strong note, as it rode a wave of a a post-pandemic economic recovery. But Russia’s invasion of Ukraine, surging European gas prices and fears that Moscow could cut off supplies further has raised the stakes of recession and caused severe damage to the European economy.
Meanwhile, the US dollar has benefited from heightened global uncertainty and the monetary policy stance taken by the US central bank, the Federal Reserve, which has been aggressive in raising rates by an average of 75 basis points.
The euro hit a low of $0.9998 in the early afternoon, its lowest level since December 2002. It was last down 0.1% on the day at $1.005 and has lost more than 10% so far this year.
To keep the Euro in line with the greenback, the European Central bank plan to hike interest rates next month but the chance of a recession would make it harder for the ECB to hike interest rates, further widening the interest-rate differential with the US which will obviously support the US dollar.
Since becoming freely available in 1999, the single currency has spent very little time below parity. The last time it did so was between 1999 and 2002, when it sank to a record low of $0.82 in October 2000.
Within its relatively short history, the euro has become the second most sought-after currency in global foreign exchange reserves and daily turnover in the euro/dollar is the highest among currencies in the global $6.6tn-a-day market.
The euro’s slide is a headache for the ECB. Allowing the currency to fall only fuels the record-high inflation it is battling to contain. But trying to shore it up with higher interest rates could exacerbate recession risks.
So it still remains to be seen if the ECB will hike interest rates this month or hold off for a while to see if a recession in the Eurozone plays out.