Euro drops to 20-year low, approaches parity with dollar

The euro slid to a 20-year low and came closer to parity against the dollar on Monday on concerns that an energy crisis will tip the region into a recession, while the US currency was boosted by expectations that the Federal Reserve will hike rates faster and further than peers.

The biggest single pipeline carrying Russian gas to Germany, the Nord Stream 1 pipeline, began annual maintenance on Monday, with flows expected to stop for 10 days, but governments, markets and companies are worried the shutdown might be extended because of the war in Ukraine.

“The most proximate concern for markets is whether or not Nord Stream 1 is going to come back online,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto, adding that “the markets will likely price in a recession” for the region if it doesn’t.

The euro tumbled 1.29% to $1.0056 against the U.S. dollar, the weakest since December 2002.

The dollar gained 1% against a basket of six major currencies, reaching 108.14, the strongest since October 2002.

The US currency has gained on expectations that the Fed will continue to aggressively raise rates as it tackles soaring inflation.

“The Fed is going to raise rates more aggressively than most other developed market central banks and we don’t think other developed market central banks really have the bandwidth to keep up,” Rai said.

The Fed is expected to lift rates by 75 basis points at its July 26-27 meeting. Fed funds futures traders are pricing for its benchmark rates to rise to 3.49% by March, from 1.58% now.

Consumer price data due on Wednesday is this week’s major U.S. economic focus. Economists polled by Reuters expect the index to show that consumer prices rose by an annual rate of 8.8% in June.

The Australian dollar fell to a two-year low as multiple Chinese cities adopted fresh COVID-19 curbs, from business halts to lockdowns, to rein in new infections, raising concerns about global growth.

The Aussie fell 1.93% to $0.6724, the lowest since June 2020.

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