The euro hit $1 on Tuesday, down about 12% since the start of the year. Fears of a recession on the continent abound, fueled by high inflation and uncertainty in energy supplies caused by Russia’s invasion of Ukraine. The European Union, which received about 40 percent of its gas through Russian pipelines before the war, is trying to reduce its dependence on Russian oil and gas. At the same time, Russia has restricted gas supplies to some EU countries and recently cut the flow of the Nord Stream gas pipeline to Germany by 60%. Now this critical part of Europe’s gas import infrastructure has been shut down for scheduled maintenance for the past 10 days. German authorities fear he may not be reinstated.
The energy crisis comes alongside an economic slowdown that has cast doubt on whether the European Central Bank can adequately tighten policy to reduce inflation. The ECB has announced it will raise interest rates this month for the first time since 2011 as inflation in the euro zone is at 8.6%.
But some say the ECB is way behind the curve and that a hard landing is all but inevitable. Germany posted its first goods trade deficit since 1991 last week as fuel prices and general supply chain chaos pushed up the cost of imports significantly.
“Given the nature of Germany’s exports, which are sensitive to commodity prices, it remains difficult to imagine that the trade balance can improve significantly from here in the next few months given the expected slowdown in the eurozone economy,” the currency notes wrote Saxo Bank strategists in a recent note.
A series of aggressive interest rate hikes by central banks, including the Fed, combined with slowing economic growth will keep pressure on the euro while driving investors to the U.S. dollar as a safe haven, analysts say.
The US Federal Reserve is well ahead of Europe in terms of tightening, raising interest rates by 75 basis points while signaling that more rate hikes are on the way this month.
This safe-haven retreat to the US dollar could become even more extreme if Europe and the US enter recession, Deutsche Global FX Research head George Saravelos warned in a note last week.
A situation where the euro trades below the US dollar in a range of $0.95 to $0.97 could “be reached,” Saravelos wrote, “if both Europe and the U.S. find themselves in (deeper) recession in Q3 while the Fed is still raising rates.”
That’s good news for Americans planning to visit Europe this summer, but it could mean bad news for global economic stability.
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