For the first time in two decades, the exchange rate between the euro and the US dollar has returned to parity. The euro reached $1.00 on Tuesday, down about 12% since the start of 2015. Unemployment fears have been stoked by high inflation and high-aspect energy uncertainty related to Russia’s invasion of Ukraine.
The European Union, which received roughly 40% of its natural gas supply from Russia before the war, is attempting to reduce its dependence on Russian oil and gas. At the same time, Russia has throttled back gas supplies to some EU countries and recently cut the flow in a critical piece of gas import infrastructure in Europe—the Nord Stream pipeline to Germany—by 60%. Now that critical piece of infrastructure has been shut down for scheduled maintenance, and German officials fear that it may not be turned on again.
Energy concerns are distracting ECB officials from their task to lower inflation. This month, the ECB has announced it will hike interest rates for the first time in seven years.
Some analysts say the European Central Bank’s (ECB) policy measures have been too little, too late and that a hard landing is inevitable. Earlier this week, Germany recorded its first trade deficit in goods since 1991 as fuel prices and general supply chain chaos significantly increased the price of imports. “Given the nature of Germany’s exports which are commodity-price sensitive, it remains hard to imagine that the trade balance could improve significantly from here in the next few months given the expected slowdown in the eurozone economy,” Saxo Bank foreign exchange strategists wrote in a recent note.
Many central banks plan to raise interest levels in the coming year, which will put pressure on the euro and spur investors to turn to the US dollar as a safe haven.
The US Federal Reserve has hiked interest rates by 75 basis points, signaling that more rate increases are on the way. The safe-haven retreat into the US dollar could become even more extreme if Europe and the US enter a recession, warned Deutsche Global Head of FX Research George Saravelos in a note last week. A situation where the euro is trading below $0.95 against the dollar could “well be reached,” wrote Saravelos, “if both Europe and the US find themselves slip-sliding in to a (deeper) recession in Q3 while the Fed is still hiking rates.” That’s good news for Americans with plans to visit Europe this summer but could spell bad news for economic global stability.