Euro sliding towards dollar parity for 1st time in 20 yrs
The euro is on the verge of US dollar parity for the first time in two decades.
Europe's common currency has already slumped to a five-year low near $1.03, buckling from a rush into the greenback as a haven from market turmoil and on the war in Ukraine. That's led the likes of HSBC Holdings Plc and RBC Capital Markets to predict the two will hit parity in 2022.
Hedge funds are already betting on it. They've piled on $7 billion in notional value into options wagers on parity in the past month alone, making it the most popular trade among those looking for a further drop in the common currency.
"The euro itself is not an attractive currency at the moment," said Francesco Pesole, a currency strategist at ING Groep NV. While the Dutch bank is keeping its official euro forecast for the next six months at $1.05, Pesole admits the dollar's strength and market volatility means parity is likely.
To a large extent the euro's plight is a function of dollar strength, which has been supercharged as the Federal Reserve presses on with bigger interestrate hikes than its peers. A fresh bout of global risk aversion that has taken the wind out of equity and credit markets is only adding momentum to the move into haven currencies.
There's also a darkening outlook for the European economy. A continuing standoff with Moscow over the supply of natural gas to the continent has raised the prospect of a pronounced slowdown. The IMF has slashed its
2022 growth forecast for the currency bloc to 2.8 per cent.
Any renewed selloff in the euro that breaches the January 2017 low of
$1.0341—almost touched on both Thursday and Friday—could set the currency up for further losses.
With the region's bonds also being dumped, the currency market may start to factor in debt risks in the euro zone, according to HSBC Holdings Plc strategists.
The spread between Italian and German yields—seen as a risk gauge—topped 200 basis points this month for the first time since the early days of the pandemic.
Not everyone is negative. Roberto Mialich, a currency strategist at UniCredit SpA, expects the euro to climb back above $1.10 in the course of next year as the Fed's hiking cycle tails off. He sees a lasting belowparity scenario as just a tail risk, and only likely if euro-zone growth slumps far more than feared.