By Herbert Lash and Marc Jones NEW YORK/LONDON (Reuters) – Safe-haven demand strengthened the dollar on Tuesday to levels last seen in 2002 while the euro slumped to two-decade lows as the latest surge in European gas prices fueled recession concerns. The dollar index rose 1.5% and the euro fell as much as 1.75% to […]
Euro slumps to two-decade low as recession fears grow
By Herbert Lash and Marc Jones
NEW YORK/LONDON (Reuters) – Safe-haven demand strengthened the dollar on Tuesday to levels last seen in 2002 while the euro slumped to two-decade lows as the latest surge in European gas prices fueled recession concerns.
The dollar index rose 1.5% and the euro fell as much as 1.75% to lows last seen at the end of 2002. It was the biggest single-day decline for the euro and the dollar’s largest gain since COVID-19 roiled markets in March 2020.
Other currencies also tumbled as recession fears tanked stocks in Europe and on Wall Street. Japan’s yen was near 24-year lows again, the Canadian dollar fell to almost 19-month lows and Norway’s crown fell more than 2% as gas workers went on strike, adding to European growth concerns.
The risk of Europe sliding into a recession rose after another big 17% jump in natural gas prices in both Europe and Britain looked set to push inflation even higher.
Concerns about how the European Central Bank will react eroded sentiment after German Bundesbank chief Joachim Nagel on Monday hit out at the ECB’s plans to try to shield highly indebted countries from surging borrowing rates.
“It will continue to be very difficult for the euro to rally in any meaningful way with the energy picture worsening and risks to economic growth increasing notably,” said MUFG’s head of global markets research Derek Halpenny.
Traders told Reuters there had also been a major dollar order in early trading, perhaps as U.S. markets were closed on Monday for the Fourth of July holiday.
Coupled with energy price angst it caused a chain reaction, spilling into both equity and bond markets and then speeding the euro’s fall as it broke through its 2017 low to fall to $1.0236.
The heavy volatility also saw the euro drop to the lowest level against the Swiss franc since the Swiss National Bank abandoned its currency cap in 2015. It fell against sterling too, although the pound’s own economic and political worries had left it below $1.20 again.
The euro’s decline is just a warning sign as to what might happen later this month if Russian gas to Germany is shut off, a move that could push the currency to breach parity and fall toward $0.98 in August, said Nomura Securities.
With the euro near two-decade lows, volatility has jumped and trading in options has increased, said Marc Chandler, chief market strategist at Bannockburn Global Forex.
“Whether it is to play for the downside like a speculative move or whether it’s a hedge against long euros, I can’t tell you,” Chandler said.
The Australian dollar fell despite the country’s first back-to-back 50-basis point interest rate hike in recent memory overnight, which also cemented the fastest run up in rates there since 1994.
The Aussie slid 1.4% to $0.677, after trading as high as $0.6895 earlier in the day. It is now down nearly 7% this year.
“We have had so many central banks hiking in these big increments that you are now getting talk of reverse currency wars,” said Rabobank FX strategist Jane Foley, referring to where central banks need to hike rates just to stop their currencies from falling.
“It could get concerning” for a number of currencies, she added, especially if the U.S. Federal Reserve pushes ahead with large rate hikes in the coming months as expected.
The dollar’s strength, meanwhile, nudged the yen back down toward a 24-year low. It was last at 135.825 per dollar.
Eastern Europe was also feeling the heat as its countries are some of the most dependent on Russian gas. MSCI’s main EM FX index hit its lowest since November 2020 with Euro-linked currencies such as the Hungarian forint, Polish zloty and Romanian leu down 1.6-2.3% against the dollar.
Currency bid prices at 12:50PM (1650 GMT)
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
Dollar index 106.7200 105.1200 +1.53% 11.558% +106.7900 +105.0400
Euro/Dollar $1.0240 $1.0421 -1.74% -9.93% +$1.0449 +$1.0236
Dollar/Yen 135.8100 135.7050 +0.07% +17.96% +136.3550 +135.5200
Euro/Yen 139.07 141.39 -1.64% +6.71% +142.3700 +138.9600
Dollar/Swiss 0.9697 0.9608 +0.90% +6.28% +0.9704 +0.9594
Sterling/Dollar $1.1916 $1.2102 -1.53% -11.88% +$1.2126 +$1.1899
Dollar/Canadian 1.3067 1.2859 +1.62% +3.35% +1.3083 +1.2844
Aussie/Dollar $0.6763 $0.6868 -1.43% -6.86% +$0.6895 +$0.6762
Euro/Swiss 0.9930 1.0016 -0.86% -4.23% +1.0032 +0.9925
Euro/Sterling 0.8590 0.8604 -0.16% +2.26% +0.8623 +0.8544
NZ $0.6135 $0.6209 -1.14% -10.32% +$0.6226 +$0.6125
Dollar/Norway 10.1135 9.8555 +2.61% +14.79% +10.1155 +9.8220
Euro/Norway 10.3596 10.2317 +1.25% +3.46% +10.3735 +10.2320
Dollar/Sweden 10.5400 10.3369 +0.23% +16.88% +10.5461 +10.3026
Euro/Sweden 10.7923 10.7670 +0.23% +5.46% +10.8105 +10.7519
(Reporting by Herbert Lash, Additional reporting by Marc Jones in London, Danilo Masoni in Milan and Sruthi Shankar; Editing by Jacqueline Wong, Bernadette Baum, Angus MacSwan and Deepa Babington)