The euro was hovering around $1.004 on Monday afternoon, down about 12% year-to-date. Recession fears on the continent abound, fueled by high inflation and energy supply uncertainty caused by Russia’s invasion of Ukraine.
Now, this critical piece of Europe’s gas import infrastructure has been shut down for planned maintenance for the past 10 days. German officials fear it may not be reignited.
The energy crisis is accompanied by an economic slowdown, which has cast doubts on the European Central Bank’s ability to tighten policy adequately to bring down inflation. The ECB announced that it would raise interest rates this month for the first time since 2011, with the eurozone inflation rate standing at 8.6%.
But some say the ECB is way behind the curve and a hard landing is almost inevitable. Germany recorded its first trade deficit in goods since 1991 last week as fuel prices and general supply chain chaos raised the price of imports dramatically.
“Given the nature of German exports which are sensitive to commodity prices, it remains difficult to imagine that the trade balance could improve significantly over the next few months given the expected slowdown in the economy. ‘eurozone economy,’ wrote currency strategists at Saxo Bank in a recent note.
A series of aggressive interest rate hikes by central banks, including the Fed, coupled with slowing economic growth will keep pressure on the euro while sending investors to the U.S. dollar as a safe haven, according to analysts. analysts.
The US Federal Reserve is well ahead of Europe in tightening, having raised interest rates by 75 basis points while signaling that more rate hikes will occur this month.
This pullback to the safe haven of the U.S. dollar could become even more extreme if Europe and the United States slip into recession, George Saravelos, global head of foreign exchange research at Deutsche, warned in a note last week.
A situation where the euro is trading below the US dollar in the range of $0.95 to $0.97 could “well be reached”, wrote Saravelos, “if Europe and the United States find themselves in sliding into (deeper) recession in Q3 as Fed continues to hike rates.”
That’s good news for Americans planning to visit Europe this summer, but it could mean bad news for global economic stability.