# Analysis-Euro peers over the cliff at dollar parity as recession looms
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-04-27
Category: TRADING
Category URL: https://financedigest.com/category/trading
Meta Title: Euro Hits 5-Year Low, Parity with Dollar Looms
Meta Description: The euro's drop to a five-year low sparks fears of parity with USD, amidst recession worries in Europe and fresh Russia gas supply embargo.
URL: https://financedigest.com/analysis-euro-peers-over-the-cliff-at-dollar-parity-as-recession-loomshtml

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By Saikat Chatterjee

LONDON (Reuters) – The euro’s drop to a five-year low is rekindling the possibility the currency will reach parity versus the dollar for the first time in two decades, as fears of a euro zone recession encourage investors to pile on the bearish bets.

Russia’s move to cut off gas supplies to Bulgaria and Poland is the latest blow for the currency, already pressured by the twin headwinds of a surging dollar and sweeping COVID-linked lockdowns in China, a major market for bloc exports. Germany and other European countries could be next in [line for restrictions on gas](https://www.financedigest.com/gas-insulated-transmission-line-market-expand-at-a-healthy-cagr-of-4-5-over-2021-2031.html "Gas Insulated Transmission Line Market Expand At A Healthy CAGR of 4.5% Over 2021-2031").

The embargo could tip the European economy into recession sooner than later and as a result we are short the [euro expecting it to weaken to at least $1.05 in the near term and maybe towards](https://www.financedigest.com/euro-rises-after-spanish-cpi-dollar-slips-towards-8-mth-low.html "Euro rises after Spanish CPI, dollar slips towards 8-mth low") parity,” said Kaspar Hense, a senior portfolio manager at Bluebay Asset Management in London.

As the single currency plumbed a [low of $1.0514 against the dollar](https://www.financedigest.com/dollar-falls-to-nine-month-low-as-powell-notes-progress-in-disinflation.html "Dollar falls to nine-month low as Powell notes progress in disinflation"), bringing April losses to 4.5%, some high-frequency financial and economic indicators are flashing red.

[Data in the euro zone’s biggest economy Germany showed consumer morale at a historic low and the government sharply cut](https://www.financedigest.com/dollar-skids-after-soft-u-s-economic-data-impact-of-opec-cuts-fades.html "Dollar skids after soft U.S. economic data; impact of OPEC+ cuts fades") its 2022 growth forecasts . A credit default swap index showed the cost of insuring exposure to lower-rated [European debt](https://www.financedigest.com/european-junk-debt-sales-spring-back-to-life-as-sentiment-improves.html "European junk debt sales spring back to life as sentiment improves") is at its highest in two years, highlighting risks companies face.

More downside is likely, said Vasileios Gkionakis, EMEA head of G10 FX strategy at Citi, adding that “speculative positioning is much cleaner than before, suggesting scope for bigger ‘short’ accumulation.”

Indeed, one-month euro/dollar [risk reversals — a option market gauge of demand for options on a currency](https://www.financedigest.com/u-s-dollar-advances-vs-major-currencies-as-risk-appetite-fades.html "U.S. dollar advances vs major currencies as risk appetite fades") rising or falling — moved sharply on Wednesday to imply more euro weakness.

The ratio of [call options on the euro](https://www.financedigest.com/europe-power-firms-need-1-5-trillion-euros-in-margin-calls-equinor-says.html "Europe power firms need 1.5 trillion euros in margin calls, Equinor says") compared to puts almost halved on Wednesday from the previous day to minus 1.8, the lowest since early-April. Call options confer the right to buy an [asset while puts enable holders to sell](https://www.financedigest.com/uks-cineworld-to-not-sell-assets-individually-denies-talks-with-amc.html "UK’s Cineworld to not sell assets individually, denies talks with AMC").

![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/99-1736815806507-compressed.jpg)

GRAPHIC: [Euro risk](https://www.financedigest.com/euro-zone-bond-yields-fall-as-ecb-policymaker-flags-recession-risk-gilts-eyed.html "Euro zone bond yields fall as ECB policymaker flags recession risk, gilts eyed") reversals https://fingfx.thomsonreuters.com/gfx/mkt/gkplgkbwnvb/euro%20risk%20reversals.JPG

THE LESSER HAWK

The [euro has moved steadily lower since peaking](https://www.financedigest.com/pound-hits-10-month-peak-euro-up-as-dollar-under-pressure.html "Pound hits 10-month peak, euro up as dollar under pressure") at $1.6 in 2008, deriving little benefit from expectations the European Central Bank may raise interest rates this year by 80 basis points.

That’s because markets are prepped for far more [aggressive tightening](https://www.financedigest.com/sterling-slides-as-bets-for-aggressive-u-s-tightening-boost-dollar.html "Sterling slides as bets for aggressive U.S. tightening boost dollar") from the U.S. Federal Reserve, with money [markets betting](https://www.financedigest.com/e-sports-betting-market-current-trends-comprehensive-analysis-and-regional-forecast-to-2031-tmr.html "E-sports Betting Market Current Trends, Comprehensive Analysis and Regional Forecast to 2031 | TMR") U.S. [rates will rise by 1% in the next two meetings](https://www.financedigest.com/the-recent-bank-of-england-meeting-the-biggest-rate-hike-recession-warning-and-the-fallout.html "The recent Bank of England meeting, the biggest rate hike, recession warning and the fallout").

[ECB rates](https://www.financedigest.com/ecb-weighs-bigger-rate-hike-with-safety-net-for-indebted-countries.html "ECB weighs bigger rate hike with safety net for indebted countries"), currently at -0.50%, won’t rise to U.S. [levels this year or the next](https://www.financedigest.com/fime-launches-the-next-generationof-its-emv-level-3-test-platform.html "FIME launches the next generationof its EMV Level 3 test platform").

In the euro zone, you’re really only [talking about getting that deposit rate out of negative territory and maybe back to slightly positive territory by year](https://www.financedigest.com/extraordinary-rollercoaster-good-friday-talks-remembered-25-years-on.html "‘Extraordinary rollercoaster’, Good Friday talks remembered 25 years on") end. What that means is that the European currency depreciates,” said Craig Inches, head of rates at Royal London [Asset Management](https://www.financedigest.com/asset-managers-on-alert-after-whatsapp-crackdown-on-banks.html "Asset managers on alert after ‘WhatsApp’ crackdown on banks").

Inches highlighted the [euro’s slump against trading partners’ currencies as worrying for bond investors as it can exacerbate the bloc’s 7.4% inflation](https://www.financedigest.com/dollar-trims-gains-vs-euro-after-u-s-inflation-data.html "Dollar trims gains vs euro after U.S. inflation data") rate.

A worsening inflation [outlook because of currency weakness](https://www.financedigest.com/uk-to-avoid-recession-this-year-but-outlook-still-weak-bcc-says.html "UK to avoid recession this year but outlook still weak, BCC says") “makes us assess the value of bond yields… are we being compensated in longer-dated bonds for the inherent term premia and future inflation risk,” he said, adding that 10-year [German bonds made little sense at sub-1% yields](https://www.financedigest.com/german-yields-steady-spreads-tighten-after-recent-repricing.html "German yields steady, spreads tighten after recent repricing").

![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/98-1736815806598-compressed.jpg)

GRAPHIC: Euro trade-weighted https://fingfx.thomsonreuters.com/gfx/mkt/zgvomlarkvd/eurotradeweighted.JPG

HURDLES TO PARITY

A move to euro-dollar parity won’t be straightforward, with currency traders [facing some stiff technical barriers](https://www.financedigest.com/smaller-smes-face-failure-due-to-cashflow-barriers.html "Smaller SMEs face failure due to cashflow barriers").

Euro downside is guarded by sizeable option contracts around the early-2017 low of $1.0340, and then the $1.02 level last [hit December](https://www.financedigest.com/uks-december-shopper-numbers-defy-inflation-and-rail-strikes-hit.html "UK’s December shopper numbers defy inflation and rail strikes hit") 2002, according to two traders.

Swift moves might also invite ECB intervention, last seen in 2000 and 2011, especially if euro weakness sparks bond [market blowouts in weaker](https://www.financedigest.com/deutsche-bank-equity-bear-market-rally-will-stretch-into-2023-dollar-weaker.html "Deutsche Bank: Equity bear market rally will stretch into 2023, dollar weaker") states such as Italy.

The latest drop may be partly down to a positioning clean-out — weekly data from Commodity Futures Trading Commission showed [hedge funds](https://www.financedigest.com/what-is-a-hedge-fund.html "What Is A Hedge Fund") broadly neutral on the euro, with short positions well off highs seen in early-2020. .

For those reasons, few banks are willing to forecast euro-dollar parity will be hit; [HSBC for instance says](https://www.financedigest.com/financial-risks-of-climate-change-overplayed-senior-hsbc-banker-says.html "Financial risks of climate change overplayed, senior HSBC banker says") the 1.0341 level of early-2017 may heave into sight “if macro and political challenges don’t abate.

Rabobank said it would reconsider its $1.10 euro forecast, noting the “stronger-for-longer” dollar, but [expects “euro-dollar parity will be side-stepped” if energy supply disruptions](https://www.financedigest.com/german-businesses-expect-only-mild-recession-as-disruptions-ease.html "German businesses expect only mild recession as disruptions ease") are averted and ECB policy tightening stays on course.

![](https://onlineworldnews.com/wp-content/uploads/2022/04/97.jpg)

GRAPHIC: [Euro slides to five-year lows](https://www.financedigest.com/analysis-euros-20-year-low-leaves-ecb-facing-costly-choices.html "Analysis-Euro’s 20-year low leaves ECB facing costly choices") https://fingfx.thomsonreuters.com/gfx/mkt/zjvqkmyxbvx/euro2704.PNG

(Reporting by Saikat Chatterjee; additional reporting by Dhara Ranasinghe; editing by Sujata Rao and Toby Chopra)


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