The euro hit exactly $1 for the first time in 20 years on Tuesday, after Russia’s decision to shut off a major natural gas pipeline threatened to wreak havoc across the region and business sentiment in Europe’s economic powerhouse hit a 10-year low.
The euro has lost around 12% in value against the dollar already this year, in part because of an expectation for the Federal Reserve to raise US rates more quickly than the European Central Bank will raise eurozone rates, even though both are racing to contain surging inflationary pressures.
Behind the drive towards the buck this week has been Russia closing the Nord Stream 1 natural gas pipeline for 10 days this month for seasonal maintenance. While closures for maintenance are routine on refineries or pipelines, the fear among European governments is that Moscow will not reopen it, which could pave the way for an epic surge in energy prices.
”This scenario will also create massive gas shortages in the region, prompting authorities to implement fuel rationing and, in the worst case, order brief shutdowns of factories to reduce energy consumption heading into the winter season, paving the way for what could be a deep recession,” Diego Colman market analyst at Daily FX, said.
“The threat of economic warfare will be on every trader’s mind and depress the euro in the coming days until market participants have a better idea of what Russia plans to do next,” he said.
The final catalyst arrived on Tuesday when an index of German businesses showed confidence hitting a 10-year low in July of -53.8, marking a sharp deterioration from June’s -28.
“The experts assess the current economic situation significantly more negatively than in the previous month and have further lowered their already unfavorable forecast for the next six months,” Achim Wambach, president of the ZEW institute, which produces the survey, said.
The euro briefly hit a session low in Europe of $0.9999, before recovering modestly to $1.00377, flat on the day. The last time it went below $1 was December 2002.
Europe relies on Russia for 40% of its natural gas needs, most of which arrive via pipeline. Russia was already piping gas at around 40% capacity through Nord Stream 1 in retaliation for Western sanctions on its financial and energy sectors over its war in Ukraine.
With regional natural gas prices now showing a 380% increase compared with last year and little prospect of shoring up inventories ahead of the winter, EU governments are scrambling to find alternative sources of fuel, firing up idled coal and even nuclear plants, and some have even considered rationing.
- After weeks of heading to parity with the dollar, the euro briefly dipped below $1.0000 on Tuesday.
Wholesale inflation in the eurozone is running at an eye-watering 36.3%, largely because of energy prices, while that in the United States is just 10.8%. The ECB has not yet raised interest rates, which are at 0%, while the Fed has raised rates to 1.75% from 0.25-0.50% at the start of the year and more large hikes are in the works.
Another unwelcome surge in natural gas prices could force manufacturers and businesses across the region to slow, or shutter activity altogether, which could keep the euro below $1.00 for some time, analysts said.
“I fear that once this dam is broken, the euro could settle below that level for the time being, until we (hopefully) know at the end of next week whether the gas is flowing again,” Commerzbank strategist Antje Praefcke said in a note.