The euro has slumped almost 12% against the dollar so far this year. The ECB has so far played down euro weakness, arguing that it has no exchange rate target, even if the currency does matter as part of the wider inflation calculations Studies frequently cited by the ECB suggest that a 1% depreciation of the exchange rate raises inflation by 0.1% over one year and by up to 0.25% over three years. Letting the currency fall would push up already record high inflation, raising the risk of price growth becoming entrenched at a rate well above the ECB's target of 2%.īut fighting back against 20-year lows for the euro would require more rapid rate hikes, which could add to the misery for an economy already facing a possible recession. WHAT DOES THIS MEAN FOR THE ECB?Ī big headache. That might prevent the euro from falling sharply. One favourable factor for the euro is that shorting the currency is already a popular trade in currency markets right now and bearish positioning is approaching historical levels. The euro could also be hurt by fragmentation risks, where weaker states' borrowing costs rise by more than wealthier peers. Even if the ECB hikes rates, the Fed is hiking by more, luring cash into the United States. Nomura has a short-term target of $0.95.Īnalysts say that until the economic outlook improves the euro will remain in the doldrums. Some global banks are forecasting a recession for the euro area as soon as the third quarter.

Growing fears that soaring European gas prices makes the euro area more susceptible to recession risks also explain why the euro is being hit hard now. The Federal Reserve hiked rates by 75 bps in June. The European Central Bank is expected to start hiking rates at its July 21 meeting. rate hikes have boosted the dollar's appeal and also as global recession fears have sent investors flocking to the safe-haven dollar. The likes of sterling and the yen have also slid this year, partly because of more aggressive U.S. Within its relatively short two-decade history, the euro is the second-most sought-after currency in global currency reserves and daily turnover in the euro/dollar is the highest among currencies in the global $6.6 trillion market per day. 1, 2002, with the currency only existing before that day as a unit of account for settling cross-border transactions. Euro banknotes and coins were only introduced on Jan. In fact, the previous time it did so was between 19, when it sank to a record low of $0.82 in October 2000. Since its birth in 1999, the single currency has spent very little time below parity. WHAT'S THE BIG DEAL?įor starters, a drop below the $1 level is rare. Here's an outline of the significance of the move. It started the year on a strong note before the war in Ukraine fuelled inflation and hurt the bloc's growth outlook. On Wednesday, it slumped to as low as $0.9998 and is down almost 12% so far this year. LONDON, July 13 (Reuters) - Europe's single currency has dropped below parity against the dollar for the first time in almost 20 years, battered by growing recession fears in the euro area.

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