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The euro falls for the second time below the bar of the dollar

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The euro plunged Monday, August 22 below parity with the dollar, at its lowest for almost twenty years, caught between a major energy crisis in Europe and an American Central Bank (Fed) still on the offensive to curb inflation.

Around 11:15 a.m., the euro lost 0.04% to 0.9939 dollars, after having fallen to 0.9901 dollars, a level not seen since December 2002 and the year of its entry into circulation.

Impact of gas prices

The announced closure, for maintenance, of the Nord Stream 1 gas pipeline, which supplies the bulk of Russian gas to Europe, between August 31 and September 2, has further accentuated fears of shortages on the Old Continent and boosted the natural gas prices in Europe.

“This increases the risk of a significant economic slowdown by the end of the year” in the eurozone, said Shaun Osborne of Scotiabank. “The evolution of energy prices and the question of supply are both very worrying, and that is what is behind this movement” downside of the euro, according to Erik Nelson of Wells Fargo.

The United Kingdom is also caught in this crisis, and the pound sterling did little better than the euro on Monday against the greenback. It was flirting with its level of March 2020, in the early days of the pandemic, at 1.1760 dollars for one pound. Prior to 2020, the British pound had not fallen below $1.18 since 1985.

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“The Sword of Damocles hanging over Europe is gone to stay there”, warns Kit Juckes, analyst at Societe Generale. And the week threatens to be even more painful for the euro, because “poor PMI indicators on Tuesday could be enough to anchor the euro under a dollar”, he warns.

The Fed still at the forefront

This development places the European Central Bank (ECB) in a difficult situation. ” very difficult “, notes Erik Nelson. An increase in its key rate at its next meeting on September 8, expected at half a percentage point, “would support a little” euro, “but with the risk of worsening the economic situation” of the area.

And even by daring to raise another half point as the market predicts, after a similar rise in July, the ECB would not catch up on the Fed, which operators are now seeing rise for a third time in a row. rate of 0.75 percentage point in September.

The difference in pace is reflected in bond rates. The spread between the yield on three-month US government bonds and those of Germany, for the same maturity, was Monday at its highest for nearly three years. “People expect the Chairman of the Fed (Jerome) Powell adopts a speech perhaps a little more offensive than in July » during his speech, scheduled for Friday at the annual meeting of central bankers in Jackson Hole (Wyoming).

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Towards a further fall in the euro?

Besides continuing to tighten, the official could insist on “the probability that inflation will remain high for a while, (…) and that the rates remain high for some time too”, says Shaun Osborne.

After banking on a possible Fed rate cut during the first months of 2023, the market is only considering it at the end of next year, which is helping to support the “greenback”another nickname for the dollar.

Some analysts see the euro skid even more as the cold season arrives, in particular Nomura, which evokes the single currency at 0.95 dollar by October, or even below. But for Shaun Obsorne, “the dollar has already gone very high and we are not convinced that it will go much further in the medium term”.

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