The euro falls to a two-decade low as recession fears mount

NEW YORK/LONDON, July 5 (Reuters) – The euro slipped to a two-decade low on Tuesday as the recent surge in European gas prices fueled recession fears in the region, while safe-haven demand for US Treasury bonds strengthened the dollar.

Many currencies were under pressure. The euro’s 1.5% slide took it to its weakest level since late 2002. The Japanese yen was again near a 24-year low, while the Norwegian krone fell 1.2% as local gas workers went on strike. Continue reading

The risk of Europe slipping into recession grew after another large 17% rise in natural gas prices in both Europe and the UK was expected to push inflation even higher. Continue reading

Concerns over how the European Central Bank will respond eroded sentiment after Deutsche Bundesbank chief Joachim Nagel on Monday criticized the ECB’s plans to protect heavily indebted countries from rising lending rates. Continue reading

“It will remain very difficult for the euro to recover in any meaningful way as the energy picture deteriorates and risks to economic growth increase notably,” said Derek Halpenny, head of global market research at MUFG.

Traders told Reuters that there was also a large dollar order in early trade, possibly because US markets were closed on Monday for the July 4 holiday.

One said that this, along with energy price fears, set off a chain reaction that spilled over into both equity and bond markets, then accelerated the euro’s fall as it broke its 2017 low of $1.0340.

The high volatility also caused the euro to fall against the Swiss franc to its lowest level since the Swiss National Bank lifted the currency ceiling in 2015. It also fell against the British pound, although the pound’s own economic and political worries kept it back below $1.20.

As the euro trades at two decade lows, volatility has spiked and options trading has increased, said Marc Chandler, chief market strategist at Bannockburn Global Forex.

“Whether it’s playing like a speculative move down or if it’s a hedge against long euros, I can’t tell you,” Chandler said.

The Australian dollar fell overnight despite the first consecutive 50 basis point rate hike in recent memory, which also cemented the fastest rate rise since 1994. read more

The Aussie slipped 1.4% to $0.677 after trading as low as $0.6895 earlier in the day. It’s now down almost 7% this year.

“We’ve had so many central banks going up in these big strides that you’re now talking about reverse currency wars,” Rabobank FX strategist Jane Foley said, pointing to where central banks need to hike rates just to prevent theirs currencies fall.

For a number of currencies, “it could get worrying,” she added, particularly if the US Federal Reserve goes ahead with big rate hikes in the coming months, as expected.

Meanwhile, the strength of the dollar sent the yen back to a 24-year low. It was last at 135.825 per dollar.

Eastern Europe also felt the heat as its countries are among the most dependent on Russian gas. MSCI’s main EM-FX index hit its lowest level since November 2020, with euro-pegged currencies like the Hungarian forint, Polish zloty and Romanian leu falling 1.6-2.3% against the dollar.

Currency bid prices at 10:08 (1408 GMT)

Additional reporting by Danilo Masoni in Milan and Sruthi Shankar; Edited by Jacqueline Wong, Bernadette Baum, Angus MacSwan and Deepa Babington

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