The euro fell to its weakest level in two decades against the dollar on Tuesday, and stock markets tumbled precipitously as global economic health is expected to deteriorate.
In a sign of deteriorating sentiment over growth prospects, the European common currency fell 1.6 percent against the dollar to $1.0257 – its lowest level since 2002.
Vasileios Gkionakis, Citi’s head of European FX strategy, said that euro-dollar parity “seems almost inevitable now”, noting that the euro’s deterioration was being offset by the prospect of further losses in European equities and a sharp rise in the euro Natural gas prices was driven up.
In stock markets, Wall Street’s S&P 500 fell 1.8 percent and the tech-heavy Nasdaq Composite fell 1.9 percent. Europe’s regional stock index, the Stoxx Europe 600, fell 1.9 percent and London’s FTSE 100 fell 2.3 percent.
Adding to the somber sentiment, futures contracts linked to TTF, Europe’s wholesale gas price, rose nearly 5 percent to a four-month high on news that Norwegian company Equinor temporarily closed three oil and gas fields after workers went on strike. Norway has warned gas exports to the UK could be halted this weekend if the situation escalates.
Jane Foley, head of FX strategy at Rabobank, said the euro’s plunge was mainly due to rising European gas prices. “The strikes in Norway are certainly not helping and I think it’s the layering of those risks that makes it increasingly difficult to be more optimistic,” she said.
“The dollar remains this primary safe haven. . . and that is a factor that exacerbates it [euro] Movement. People want dollars in times of stress and anxiety,” she added.
Guilhem Savry, head of macro and dynamic allocation at Unigestion, suggested equity markets still need to fall further. “The recession theme has made a comeback,” he said. “Although markets are now beginning to price in a slowdown in inflation and hawkish central banks, we have yet to see the bottoms in equity markets where we could comfortably return to risk.”
German government bonds rallied on Tuesday, with the yield on the 10-year Bund – which is used as an indicator of the cost of borrowing across the euro zone – fell 0.14 percentage points to 1.2 percent. The two-year yield slipped 0.17 percentage points to 0.46 percent.
Elsewhere, the yield on the 10-year US Treasury lost 0.09 percentage points to 2.81 percent. Bond yields fall when their prices rise.
Yields on German Bunds and Treasury bills had risen earlier this year as the European Central Bank and US Federal Reserve signaled aggressive rate hikes and plans to roll back large asset purchase programs to combat searing inflation.
The Fed raised interest rates by 0.75 percentage points in June, the largest such hike since 1994.
But investors have in recent weeks scaled back expectations of how much the world’s most influential central bank will hike borrowing costs in the coming months amid mounting signs of an economic slowdown.
Futures markets are suggesting the Fed is now expected to hike rates to 3.3 percent by early 2023, down from 3.9 percent forecast three weeks ago.
Details of the Fed’s latest monetary policy meeting, due to be released on Wednesday, could provide further clues as to the extent to which the central bank is poised to tighten monetary policy. A closely-watched US jobs report on Friday will also signal the level of heat in the country’s job market, a criterion that could also influence Fed decision-making.
Additional reporting by Nikou Asgari
