The euro fell below par for the first time in nearly 20 years against the dollar on Wednesday, on hawkish Federal Reserve (Fed) stance and concerns over rising recession risks in the euro zone.
The euro fell below parity mainly due to US inflation data.
The European single currency has started the year strongly amid the pace of post-pandemic economic recovery. But Russia’s invasion of Ukraine, soaring gas prices in Europe and fears that Russia could cut supplies further have fueled recession expectations and hurt the euro.
Meanwhile, the safe-haven U.S. dollar has benefited from heightened global uncertainty and the Fed’s aggressive monetary policy stance.
The euro fell as much as 0.4% to a low of $0.9998 at 8:45 a.m. ET on Wednesday, its lowest level since December 2002. It was last down 0.1% on the day at $1.005 and has fallen more than 10% this year.
“Gas rationing, stagflation, recession expectations are all good reasons to be bearish on the euro,” said Stuart Cole, chief macro economist at Equiti Capital in London.
Those factors would make it harder for the European Central Bank (ECB) to raise interest rates, further widening the spread with the United States, he added.
Since its inception in 1999, the European single currency has barely traded below dollar parity. In fact, the last time this level was seen was between 1999 and 2002; it fell to an all-time low of $0.82 in October 2000.
The euro is the second most popular currency in global foreign exchange reserves over the past 20 years, and EUR/USD has the highest daily trading volume of any market currency in the world at $6.6 trillion per day.
The euro’s slide is a headache for the ECB. Allowing the currency to fall will only fuel the record high inflation that the ECB is trying to control; but trying to prop it up with higher interest rates could exacerbate recession risks.
So far, the ECB has played down the issue, arguing that it has no exchange rate target, even if the currency does matter. On a trade-weighted basis relative to trading partner currencies, the euro has fallen just 3.6 percent this year.