Financial Associated Press, July 8 (Editor Niu Zhanlin) Affected by the rising risk of economic recession in the euro zone and the strength of the US dollar, the exchange rate of the euro against the US dollar fell to 1 to 1.0074 on Friday, the lowest level in the past 20 years, infinitely close to parity. The euro has fallen more than 10 percent against the dollar this year.
The sharp weakening of the euro exchange rate was mainly due to the recent slowdown in European economic growth, and the market continued to lower expectations for the European Central Bank to raise interest rates. In addition, the market's expectations for a substantial rate hike by the Federal Reserve at the end of July strengthened, leading to a strengthening of the US dollar exchange rate.
Market participants believe that the European Central Bank expects to raise interest rates to curb inflation, and is worried that the increase in interest rates will lead to increased debt pressure in some southern European countries, so they are slow to take action. The European Central Bank's pace of tightening has lagged far behind the Fed, weighing on the euro's exchange rate.
In addition, the energy crisis facing Europe is also catastrophic. Concerns about energy supply shortages may not only drive up European inflation, but also cause corporate layoffs, hit consumer spending and economic growth.
While the euro's fall to parity with the dollar won't have any concrete consequences for the market or the economy, less than one euro per dollar signifies different economic fortunes on both sides of the Atlantic, which could force European officials to reassess the magnitude of rate hikes.
For much of the year so far, traders and strategists have been betting on the possibility of the euro falling to parity, even though it was a long way off then and is now close at hand.
Derek Halpenny, chief analyst at Mitsubishi UFJ Financial Group, said it is difficult for the euro to appreciate significantly in the future as the energy crisis intensifies and risks to economic growth increase significantly.
Citigroup reiterated on Friday that the decision to short the euro against the dollar should be clear to investors after the U.S. jobs report for June showed the Federal Reserve will continue to raise interest rates aggressively in the coming months. Investors should short EUR/USD with a target of 1.0141, which is expected to fall towards 0.97, with a stop loss at 1.0225.
Tom Fitzpatrick, chief foreign exchange technical strategist at Citibank, said Friday's jobs report cemented expectations for a 75 basis point rate hike at the Fed's July meeting, and a rise in U.S. Treasury yields should further support the dollar.
James Athey, investment director at Abrdn, said he sees the euro falling to around 0.97 against the dollar and sees a deeper drop in the short term. "I think EUR/USD is likely to be below 0.9."
Analysts at Deutsche Bank estimated that EUR/USD could fall to 0.95-0.99 after breaking parity. "A break below parity would imply market expectations for an impending recession in the euro zone, and a huge negative impact from the energy crisis."
For the euro zone, a weaker euro makes imports, especially key commodities, more expensive, adding to inflationary pressures in Europe. But unlike in the past, a weaker euro is not expected to give euro zone manufacturers much of a boost by boosting exports.
Brad Bechtel, global head of foreign exchange at Jefferies, said: “In theory, a weaker euro is good for exporters, such as Germany, but they are now facing supply chain and gas supply issues and may not have enough production capacity.”