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Euro plunges to its lowest level since 2002

Energy supply cuts cause the common currency's biggest weakening against the US dollar in two decades
euro

PHOTO/ARCHIVO  -   The collapse of the euro, the common currency created in 1999, raises fears of a recessionary downturn

The eurozone trembles: the single currency has fallen to its lowest level in two decades. The currency plunged 1.75% on Tuesday, hitting its lowest level since December 2002, in its biggest one-day loss of value since COVID-19 shook markets in March 2020. Economists predict that it is only a matter of time before the euro reaches parity with the US dollar - perceived as a safe haven in times of crisis - a one-to-one exchange rate, something unprecedented since the creation of the single currency in 1999. 

The euro fell by 1.3% against the US currency to USD 1.0281, part of a long-term negative trend. Since the beginning of 2022, the single currency has weakened by 8% against the dollar as a result of inflation and rising energy supplies - prices in Europe have reached their highest level in four months. Analysts say the vulnerability is due to the heavy dependence of countries such as Germany and Italy on Russian gas and fears of rate hikes by the European Central Bank (ECB). 

Reserva Federal
PHOTO/@federalreserve  -   Federal Reserve Chairman Jerome Powell

At the same time, the US dollar posted its biggest one-day gain since 2020. Bolstered by the tight monetary policy pursued by the Federal Reserve, which has opted for aggressive rate hikes to quell runaway inflation - at 8.6% in May - the US currency gained 1.6% and rose against the euro and related currencies, such as the Hungarian forint, the Polish sloti and the Romanian leu. Continued rate hikes by the Federal Reserve, as planned, would make it more attractive to hold assets in dollars than in euros. 

The common currency also fell against sterling despite the fact that the United Kingdom is facing its own economic problems. Currencies such as the Japanese yen and the Australian dollar are also experiencing a period of severe instability in a context in which the risk of recession is growing by leaps and bounds, fuelled by the rise in bond yields and the increase in European governments' borrowing costs. Yet it is precisely the 19 eurozone countries' fear of slowing economic growth that has caused the euro to fall. 

Olaf Scholz
PHOTO/@Bundeskanzler  -   German Chancellor Olaf Scholz

Less optimistic analyses anticipate that the single currency could even break the expected parity in August and register around 0.98 dollars by then in the event that Russia definitively cuts off gas supplies to Germany. The vicissitudes have led Berlin to post its first trade deficit since 1991 after reunification in May as a result of supply-chain tensions, data that have set off alarm bells in the rest of the eurozone. If the continent's strongest economy starts to weaken, the rest will follow suit. 

German Chancellor Olaf Scholz acknowledged the situation and warned in a message to the nation that the economic crisis would be prolonged in time, when forecasts point to a recession. The Social Democrat leader believes Germany faces a "historic challenge" in the wake of Russia's invasion of Ukraine. Since the start of the war, Moscow has cut off energy supplies to Europe in response to six rounds of Western sanctions, and plunged the continent into an inflationary spiral with little precedent.

Christine Lagarde
PHOTO/@Lagarde  -   The President of the European Central Bank (ECB), Christine Lagarde

For the first time in more than a decade, the European Central Bank (ECB) has made public its intentions to raise interest rates in July in a bid to tackle runaway inflation, which is approaching double digits in the eurozone. The monthly hike, expected to be 0.25%, will not be the only one until the end of the year. However, a growing number of analysts are sceptical of the institution chaired by Christine Lagarde, suggesting that it may be acting too late. The euro's recent plunge further aggravates this scenario. 

The Federal Reserve, for its part, has been committed to the most ambitious rate hikes in almost three decades at a time when inflation is at its highest level in 40 years, meaning that investors are more inclined to put their funds in the US as they can extract better yields. Moreover, this week's 9% drop in the price of Brent crude oil, the global benchmark, adds to negative indicators about the global economic outlook.