The euro fell on Tuesday, July 12, to 1 dollar, a threshold that had not been reached since the year it was put into circulation, two decades ago. The single European currency is weighed down by the risk of a cut in Russian gas supplies for the European Union.
Investors favored the greenback, which has gained almost 14% since the start of the year and briefly traded at 1 dollar for 1 euro when questions about the brand new single currency weighed on its price.
The market is worried about a major energy crisis on the Old Continent, doubting the restoration, by Russia, of gas flows after an interruption for maintenance on the Nord Stream 1 gas pipeline. This situation accentuates fears of recession in Europe.
Energy from Russia “is at the heart of the turmoil in Europe” and Canada’s announcement on Saturday that it would return turbines for the Nord Stream gas pipeline to Germany to ease the energy crisis with Russia “has no positive impact”comments Jeffrey Halley, analyst at Oanda.
The Nord Stream 1 gas pipeline under maintenance
On Monday, the major Russian energy group Gazprom began ten days of maintenance on the Nord Stream 1 gas pipeline. Germany and other European countries are waiting to see if gas delivery will be restored. “The key question is whether the gas will come back after July 21. The markets seem to have already made up their mind.”, notes Mr. Halley. For Mark Haefele, analyst at UBS, the end of Russian gas deliveries to Europe “would cause a eurozone-wide recession with three consecutive quarters of economic contraction”. The European Central Bank (ECB) will therefore find it difficult to tighten its monetary policy to fight galloping inflation without worsening the economic situation.
The US Federal Reserve (FED) has more leeway to continue its rate hikes, as employment figures released on Friday showed that the US economy is holding up better so far. The euro’s slide could continue.
Difficulty against the Swiss franc
On Wednesday, inflation data from France, Germany and the United States could fuel investor concerns about a divergence of economies on both sides of the Atlantic. “If US inflation is stronger than the market expects, it could benefit the dollar”investors are betting that the FED will have to act even faster to raise its rates, said Fawad Razaqzada, analyst at Forex.com.
The euro rose very slightly after reaching 1 dollar, and was trading around 12:10 p.m. for 1.0024 dollars. “Investors are struggling to cross the symbolic threshold of parity” and bring the euro below that level, said XTB analyst Walid Koudmani. “This slow pace proves that this is a long-term movement, selling the euro and buying the dollar, and not a manipulation of the market”adds Mr. Razaqzada.
The euro is also in trouble against the Swiss franc, also a safe haven: it fell to 0.9836 Swiss francs, its lowest since 2015. And the dollar also shines against other currencies considered vulnerable to risk: the pound sterling plunged to $1.1807, the lowest level since March 2020, when the start of the Covid-19 pandemic in Europe, in the midst of Brexit negotiations, had pushed the British currency back to its lowest level since 1985.