Pourquoi l’euro a atteint son plus bas niveau face au dollar

Pourquoi l'euro a atteint son plus bas niveau face au dollar

The euro at its lowest point. The European currency fell below the parity threshold with the dollar on Monday, August 22. The euro lost 0.84%, falling to $0.9951, a level not seen since the year it came into circulation in 2002. The European currency had already fallen below parity for the first time in mid-2002. July. In reality, it is not so much the euro that falls as the dollar that rises. War in Ukraine, dependence on Russian hydrocarbons, threat of recession in Europe and tightening of the US Federal Reserve (Fed)… Franceinfo explains why the dollar has fallen against the euro, to its lowest level since 2002.

Because the energy crisis worries investors

Energy prices are at their highest level in Europe. The Old Continent, highly dependent on Russian gas, is affected by an energy crisis that has multiple consequences for the economy. The price of European gas had risen this Monday by more than 20% in a week to stand at 295 euros per megawatt hour (MWh), close to the records registered during the first days of the war in Ukraine, it points out. The galery.

Europe is weakened by its geographic proximity to the war in Ukraine and by its dependence on Russian oil and gas. In this period of uncertainty, the dollar has regained its safe haven status for several months, which explains its strength against the euro.

In this already tense context, Russia has once again announced that it will have to close the Nord Stream 1 gas pipeline, which supplies the bulk of Russian gas to Europe, between August 31 and September 2. This accentuates fears of scarcity and of a rise in natural gas prices in Europe. “The evolution of energy prices and the issue of supply are very worrying, and that is what is behind this movement” to the fall of the euro, analyzes Erik Nelson, of Wells Fargo, with AFP.

The European currency is not the only one affected. The UK is also caught up in this crisis and the British Pound did little better than the Euro on Monday against the Dollar. It flirted with its March 2020 level, in the early days of the pandemic, at $1.1760 a pound. Heavily dependent on Russian supplies, Hungary saw the guilder fall to its lowest level ever against the dollar, at 411 guilders to the dollar. And the uncertainties are not likely to dissipate any time soon. “The Sword of Damocles that hangs over Europe is gone to stay”warns Kit Juckes, an analyst at Societe Generale at AFP.

Because a risk of recession hangs over Europe

The energy crisis in Europe is also fueling fears of a recession. “This increases the risk of a significant economic slowdown at the end of the year” in the eurozone, Scotiabank’s Shaun Osborne told AFP.

One of the consequences of rising energy prices is inflation in Europe. It had started to rise with the post-Covid-19 recovery of the economy and rose with the start of the Russian invasion of Ukraine. It reached 8.9% in July 2022 in the euro zone. In Germany, she could “exceed 10% in the coming months”warn the echoes. The rise in energy prices caused by the conflict is especially hurting the powerful German industry. Growth in Germany remained flat in the second quarter, weighed down by accelerating inflation after the war in Ukraine, which is weighing on purchasing power and industrial activity, according to the German statistics institute Destatis.

Europe’s leading economy is struggling in “a difficult global economic context, with the Covid-19 pandemic, interrupted supply chains, rising prices and the war in Ukraine”Destatis explained in a press release. “Most figures now indicate that we are on the verge of a recession”commented Jens-Oliver Niklasch, an analyst at LBBW Bank.

As winter approaches, the risk of a recession looms over Germany and, by extension, Europe. Although its growth forecasts remain positive, the IMF has revised them down for the euro zone. Its report on the prospects for the world economy forecasts GDP growth of 2.6% in 2022 and 2% in 2023 for the euro zone, lower than its previous forecasts.

This uncertainty encourages, here again, investors to turn to the dollar. To make matters worse, the dominance of the greenback over the euro forms a vicious circle. The cost of imports increases for Europeans with a less strong currency, in particular that of oil, fixed in dollars. In six months, the rise in the price of crude oil reached 66% in dollars, but 78% in euros, says The Figaro. This further increases inflation for households and businesses.

A trend that is here to stay. “After briefly touching parity with the dollar in July, the euro should this time settle permanently below and oscillate until the end of the year between 0.95 and 1, Lee Hardman, a foreign exchange specialist at MUFG Bank, told the Figaro. The fear of a recession in Europe will increase with the arrival of winter due to the energy crisis and does not seem to dissipate in the short term.

Because the Fed raises its interest rates faster than the ECB

The value of the dollar is supported by the monetary policy of the US central bank, the Fed. To contain inflation in the United States, it raises its interest rates. But the European Central Bank (ECB) cannot keep up.

Recession fears in Europe could prevent the ECB from raising interest rates so aggressively. Furthermore, the consequences would be diverse for the Member States. A rise in interest rates would weaken countries already in trouble, raising fears of a new sovereign debt crisis.

This context places the ECB in a situation “very difficult”, points out Erik Nelson, of Wells Fargo with AFP. An increase in its key rate at its next meeting on September 8, expected by half a percentage point, “I would support a little” euro, “but with the risk of worsening the economic situation” of the area. Même en osant a new relèvement d’un demi-point, après une hausse similaire en juillet, the ECB ne referait pas son retard sur la Fed, que les opérateurs voient désormais remonter une troisième fois d’affilée ses taux de 0.75 point in September.

The difference in pace is reflected in bond rates. The gap between three-month US government bond yields and those of Germany for the same maturity was at its highest level in nearly three years on Monday. In addition to further tightening, Fed Chairman Jerome Powell may insist on “the probability that inflation remains high for a while, (…) and that rates remain high for a while”Shaun Osborne of Scotiabank told AFP. After pricing in a possible Federal Reserve rate cut in the first few months of 2023, the market will only price it in late next year, which is helping to support the dollar.

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