August 11, 2022

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Euro drops to two-decade low as recession fears grow

Euro drops to two-decade low as recession fears grow
  • The euro fell to its lowest level since the end of 2002
  • The dollar is rising due to the demand for safe haven
  • Yen drops near 24-year lows again

NEW YORK/LONDON (Reuters) – The euro sank to a two-decade low on Tuesday as a recent rise in European gas prices heightened recession fears in the region, while safe-haven demand for U.S. Treasuries boosted the dollar.

Many currencies came under pressure. The 1.5% drop in the euro brought it to its weakest level since the end of 2002. The Japanese yen was close to a 24-year low again, while Norway’s crown fell 1.2% as gas workers went on strike there. Read more

The risk of Europe sliding into recession grew after another big 17% jump in natural gas prices in both Europe and Britain seemed poised to push inflation higher. Read more

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Concerns over the European Central Bank’s reaction eroded sentiment after German Central Bank President Joachim Nagel on Monday directed European Central Bank plans to try to protect heavily indebted countries from higher borrowing rates. Read more

“It will remain extremely difficult for the euro to gain in any meaningful way as the energy picture deteriorates and risks to economic growth increase significantly,” said Derek Halpini, head of global markets research at MUFG.

Traders told Reuters there were also large dollar orders in early trading, possibly with US markets closed on Monday for the July 4th holiday.

One said that in combination with concern about rising energy prices, it triggered a chain reaction, spilled into the stock and bond markets, and then accelerated the euro’s slide as it broke through to its 2017 low of $1,0340.

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Extreme volatility has also seen the euro slide to the lowest level against the Swiss franc since the Swiss National Bank ditched its currency ceiling in 2015. It also fell against the pound, although economic and political concerns for the pound have left it below $1.20 again.

With the euro trading at a two-decade low, volatility has jumped and options trading has increased, said Mark Chandler, chief market strategist at Bannockburn Global Forex.

“Whether it’s to the downside like a speculative move or whether it’s a hedge against buying the euro, I can’t tell you,” Chandler said.

The Australian dollar fell despite the country’s first consecutive interest rate increase of 50 basis points in recent memory overnight, also fueling the fastest rate hike there since 1994. Read More

The Australian dollar fell 1.4% to $0.677, after trading as high as $0.6895 earlier in the day. It’s now down about 7% this year.

Pointing to where central banks need to raise rates just to prevent their currencies from depreciating, Jane Foley, strategist at Rabobank FX, said: “We’ve had a lot of central banks raising rates in such big increases that you’re now talking about Reverse currency wars.

“It could be worrying” for a number of currencies, she added, especially if the US Federal Reserve drives significant rate hikes in the coming months as expected.

Meanwhile, the dollar’s strength has pushed the yen to a 24-year low. The last time was at 135.825 per dollar.

Eastern Europe was also upset that its countries were among the most dependent on Russian gas. MSCI’s main index of emerging markets hit its lowest level since November 2020 with the euro-linked currencies such as the Hungarian forint, the Polish zloty and the Romanian leu falling 1.6-2.3% against the dollar.

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Coin quote prices at 10:08 am (1408 GMT)

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Additional reporting by Danilo Masoni in Milan and Sruthi Shankar. Editing by Jacqueline Wong, Bernadette Baum, Angus McSwan and Deepa Babington

Our criteria: Thomson Reuters Trust Principles.