The euro may have recovered on July 13, a day after slipping to its lowest levels in 20 years and hitting parity with the US dollar, but the European currency has odds stacked against it.
The euro, which was trading at 1.0050 in the afternoon, sank to 1.0000 against the dollar overnight, its lowest level since 2002, amid worries of a recession and high inflation in Europe.
"It seems like it's a very gloomy outlook for the euro..., a sub-parity paradigm is very much in the cards," Mazen Issa, senior FX strategist at TD Securities in New York, told Reuters, adding that the single currency could drop to the 85-90 cents US level.
Several factors are at play against the euro including the fear that Russian President Vladimir Putin may cut off some key energy exports to the European Union ahead of the winter.
Also Read: Indian rupee hits record low for a third straight session
Russian oil major Gazprom has temporarily shut down Nord Stream 1, the biggest single pipeline carrying gas to Germany, for “annual maintenance” for 10 days.
Some reports, however, said Moscow may not resume the flow of gas even after maintenance was over. Inflation and a recession are the other risks.
Also read: Russian gas flows to Europe fall further amid diplomatic tussle
“The most proximate concern for markets is whether or not Nord Stream 1 is going to come back online,” news agency Reuters quoted Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto, as saying. “The markets will likely price in a recession” for the region if it doesn't, he added.
“We see GDP falling over 1.5 percent in the year to Q2 2023. A gas supply freeze into Germany is a key risk. If avoided, we see ECB rates rising 175 basis points before modest cuts next year,” said Nomura, referring to the European Central Bank.
The dollar index, which measures the value of the American currency against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, has seen high volatility.
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The Indian currency, too, has been on a record downward spiral against the dollar. On July 13, it was trading at around Rs 79.61 to a dollar, a tad above the record low of 79.86 it plunged to for some time the previous day.
“We expect the dollar index to remain volatile in today’s session ahead of the US inflation data and expect it to hold 106.40 levels on a daily closing basis,” said Rahul Kalantri, VP Commodities, Mehta Equities.
Strength in the dollar and weakness in the domestic equity markets pushed the rupee lower.
“Persistent FII selling in the domestic equity markets since the beginning of this year, widening trade deficit and decline in the foreign currency reserves have weighed heavily on the rupee. We expect the rupee to remain volatile this week and could hold its key support level of 80.05,” he said.
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