What is the next step for the euro after its fall against the dollar?

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London (AFP) – The fall of the euro against the dollar, triggered by the war in Ukraine and the growing risks for the EU economy, brought the two currencies to parity for the first time in two decades.

Europe’s single currency fell to $0.9952 on Thursday, a level not seen since late 2002, the year of its official introduction.

But traders believe the euro could rally, provided it breaks through several hurdles in the coming months.

The first to overcome is to avoid the risk of a cut in Russian gas supplies to Europe, which would drive up electricity prices and force eurozone countries to limit certain industrial activities.

“If gas flows from Russia normalize, or at least stop falling, after the Nord Stream 1 maintenance shutdown ends next week, this should somewhat alleviate market fears of a crisis. impending gas in Europe,” Esther Reichelt, an analyst at Commerzbank, told AFP.

Russian gas giant Gazprom having warned that it could not guarantee the proper functioning of the gas pipeline, European countries fear that Moscow will invoke a technical reason to permanently stop deliveries and put pressure on them.

French President Emmanuel Macron even said on Thursday that Russia was using energy “as a weapon of war”.

If Nord Stream 1 “does not turn back on, the euro will fall as economic shockwaves will be felt around the world as the European energy crisis could very well trigger a recession”, warned Stephen Innes, analyst at SPI Asset Management. .

ECB wake-up call

“The recession would inevitably mean that the market becomes even more concerned about the risks of fragmentation in the euro zone,” added Jane Foley, currency specialist at Rabobank.

Like other central banks, the European Central Bank (ECB) seeks to avoid stifling the economy by raising rates too steeply.

But it must also worry about a possible fragmentation of the debt market, with large differences in borrowing rates across the euro zone.

The ECB has so far maintained an ultra-accommodative monetary policy to support the economy, while the US Federal Reserve has instead raised rates and promises to continue to do so to counter inflation.

It will announce its monetary policy decision on Thursday and indicated that it would raise rates for the first time in 11 years.

“If the ECB is aiming to give the euro a boost, it will need to hike 50 basis points in July and/or signal that moves of 75 basis points are expected for September,” the analysts said. S&P analysts in a note.

“Quicker policy adjustments now would help anchor inflation expectations, reducing the risk of needing restrictive policy later,” they added.

Fed Slowdown

For economists at Berenberg, the fall in the euro is more attributable to the strength of the dollar, which “has appreciated strongly against a broad basket of currencies since mid-2021”.

The dollar benefited from the tightening of monetary policy by the Fed, which is trying to limit inflation, which again reached historic highs in June.

“Markets are speculating that the Fed may raise rates by 100 basis points instead of 75 basis points at its next meeting on July 27,” Berenberg noted.

“If so, it could further strengthen the dollar.”

UniCredit added: “Towards the end of the year, the outlook for lower inflation and more balanced messaging from central banks as the cyclical peak in official rates approaches should support a return to risk appetite. and ease USD demand.”

If this happens, the euro could move away from parity in the last months of 2022, they say.

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