The euro touches parity with the dollar for the first time since 2002

The price of the euro against the dollar has continued to weaken this Tuesday until reaching, for the first time since 2002, the level of parity between the two currencies, weighed down by the growing fear of a recession in the euro zone and the different rate of normalization of the monetary policies of the respective central banks.

In this way, after knowing the substantial worsening of the confidence of German investors, according to data from the Leibniz Center for European Economic Research (ZEW, for its acronym in German), the cross between the euro and the dollar briefly touched the equivalence level, after almost twenty years in which a euro had always been worth more than a dollar.

However, after briefly falling to the parity level, the price of the euro has rebounded slightly to trade for 1.0066 dollars after the closing of the markets of the Old Continent.

So far this year, the euro has accumulated a depreciation of almost 15% against the dollar as a result of the fear that the eurozone will end up entering a recession due to the impact of the war in Ukraine on prices and markets, as well as the advance with which the United States Federal Reserve (Fed) began to tighten its monetary policy compared to the European Central Bank (ECB).

In fact, while the ECB has announced that it will undertake its first rate hike since 2011 next week, with a rise of 25 basis points, the Fed began the normalization of its monetary policy last March, with a rise of 25 basis points, which was followed by increases of 50 and 75 basis points, respectively, in the two following meetings.

In this sense, Morganne Delledonne, head of investment strategy for Europe at Global X, warns that with parity with the US dollar the eurozone "faces headwinds with higher imported inflation, while US companies gain purchasing power ".

Thus, the balances of payments in the eurozone and the United Kingdom are deteriorating and the risk of recession is increasing in the region, which reinforces the strength of the dollar against the pound sterling and the euro.

For its part, the Ebury research team believes that concerns about the global recession are somewhat excessive and that the strength of labor markets, the high excess savings accumulated during the pandemic and the specific fiscal programs should support the spending of the consumers and avoid technical downturns in most cases.

In any case, they consider that, as long as there is a divergence in gas prices on both sides of the Atlantic, it is likely that investors will continue to favor the dollar in the short term, so further movements below parity cannot be ruled out. and they warn that a complete interruption of gas supplies to Europe by Russia "would pose a significant risk to EUR/USD".

"From now on, it will be interesting to see how the ECB reacts to the latest depreciation of the euro," Ebury analysts note, as a weaker euro has inflationary implications, so policymakers could choose to raise interest rates. interest more aggressively to try to help the currency, assuming they can convince the markets that their new anti-fragmentation tool will actually work.