The euro hovered a whisker above parity to the dollar today, with traders wary of the single currency being forced to levels unseen for decades if US inflation data, due to be released later today, shows a sky-high reading.
The greenback was firm in Asia trade, and neither the New Zealand dollar or South Korea’s won drew much support from the expected 50-basis point increases in interest rates by their central banks.
The euro languished at $1.0036 today. It is down nearly 12% this year and fell to a 20-year low yesterday as the war in Ukraine has triggered an energy crisis that has hurt the continent’s growth outlook.
It dropped as low as $1.00005 on the most widely used Electronic Broking Services’ dealing platform and touched $1 on Reuters dealing overnight.
Ronan Costello, Head of FX Strategy with Bank of Ireland said the euro hit parity with the dollar very briefly, “it was for a matter of seconds and then it bounced higher again, but it is still trading very close to parity and it’s likely to trade back down there in the near future”.
He explained that the euro has had very little going for it over the past 12 months and there has been a very strong move into the dollar.
“If you look at the currencies that have done well this year, they’ve done so for a number of possible reasons. Some because they have benefitted from higher commodity prices so the improvement in their terms of trade has attracted capital into their currencies,” Mr Costello said.
“Other currencies are seen as safe havens in times of conflict, and finally you have high yielding currencies or currencies that have attracted capital on the basis of higher deposit or investment rates, and the problem for the euro is it hasn’t been benefitting from any of these factors for the past 12 months, so it has been comfortably outperformed by the US which is not just a safe haven currency but also one that offers a much higher deposit rate than the euro.”
Economists forecast headline US inflation accelerated to 8.8% year-on-year in June, a 40-year high, which is likely to reinforce expectations of interest rate hikes and help the dollar.
The euro fell below parity with the Swiss franc last month and is flirting with a drop beneath its 200-day moving average against the pound.
Weakness in the euro and yen has lifted the US dollar index, which scaled a two-decade peak of 108.560 this week and was hovering at 108.18 in Asia trade today.
The Japanese yen has taken a beating this year as the Bank of Japan sticks with its ultra-easy monetary policy in contrast with tightening nearly everywhere else.
It was under pressure at 137.05 per dollar today after hitting its lowest since 1998 on Monday at 137.75.
The Australian dollar was steady at $0.6767, just above a two-year trough of $0.6712 reached yesterday.
Sterling has also slipped on the stronger dollar and analysts see it adrift in the wake of the resignation of British Prime Minister Boris Johnson last week. Eight Conservatives are vying to succeed Johnson.
“The combination of slow growth, debt and high inflation is likely to prove very tricky for the new Tory leadership,” said Rabobank senior strategist Jane Foley. “Sterling may suffer a lack of fresh direction until the new PM is in place.”