June 18, 2024

The euro has fallen to parity with the dollar for the first time in 20 years as another jump in inflation in the United States added to concerns about higher interest rates and the increasing risks of a global recession.

The single currency, which had been trading close to parity on worries about the prospects for its energy-dependent economy, slipped yesterday to $0.9998 against the dollar.

The euro has been the worst performing major currency over the past week and has dropped by more than 10 per cent against the dollar this year.

The dollar has been boosted by increased uncertainty about global growth and the Federal Reserve’s aggressive interest rate rises to curb rising inflation. The currency, seen as a safe haven in times of market turmoil, has risen to a two-decade high against a basket of currencies, including the euro and the pound.

US inflation hit a 40-year high of 9.1 per cent in June, yesterday’s data showed. Rising prices on petrol station forecourts and supermarket shelves helped to push inflation up by 1.3 per cent month-on-month, following a 1 per cent rise in May. This has buoyed the dollar and increased the chances of the Fed raising rates by 75 basis points.

Markets were yesterday pricing in a 51 per cent chance of a 100 basis-point rise when policymakers next convene at the end of this month, according to CME’s FedWatch tool, up from just 7.6 per cent on Tuesday. Traders were pricing in a 49 per cent chance of another 75 basis-point increase.

“This report confirms that the Fed will need to hike by 75 basis points again at the end-July meeting,” Michael Pearce, senior US economist at Capital Economics, said. However, he noted that retreating commodity prices and signs of an economic slowdown should weaken price pressures going forward. “That in turn should help to contain expectations that Fed officials will opt for an even larger 100 basis-point hike.”

Richard Carter, head of fixed interest research at Quilter Cheviot, said the latest US data “marks another false dawn in the battle against inflation and we now have to question just how close are we to the peak”. Inflation has also hit America’s northern neighbour; yesterday the Bank of Canada raised its key interest rate by 100 basis points to 2.5 per cent to curb inflation, its biggest jump in more than two decades.

New York’s leading share indices fell into the red at the opening of trading on Wall Street yesterday but by the close had clawed back some of the losses. The S&P 500 closed down 0.5 per cent at 3,801.78 and the technology-focused Nasdaq fell 0.2 per cent to 11,247.58. The Dow Jones industrial average lost 0.7 per cent to finish at 30,772.79.

Lee Hardman, currency analyst at MUFG, said the euro could be heading far below $1 as Russia threatens further delays to gas supplies through its Nord Stream 1 pipeline and that the European Central Bank could be forced to prematurely end its planned monetary policy tightening to support the economy. “We are approaching Europe’s endgame in gas markets,” he said.

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Euro falls to parity with the dollar