Europe’s shared currency has already fallen to a five-year low at $1.03, collapsing from a rush into the dollar as a safe haven from market turbulence and the Ukraine crisis. As a result, HSBC Holdings Plc and RBC Capital Markets estimate the two will reach parity in 2022.
Hedge funds have already placed bets on it. They’ve poured $7 billion in notional value into parity options wagers in the last month alone, making it the most popular trade among those expecting the common currency to fall further.
“At the moment, the euro is not an appealing currency,” said Francesco Pesole, a currency strategist at ING Groep NV. While the Dutch bank’s official euro projection for the next six months remains at $1.05, Pesole concedes that the dollar’s strength and market volatility indicate that parity is possible.
To a significant measure, the euro’s suffering is a reflection of dollar strength, which has been boosted as the Federal Reserve continues to raise interest rates faster than its rivals. A new round of global risk aversion, which has knocked the wind out of equities and credit markets, is simply adding fuel to the run towards haven currencies.
The European economy’s prognosis is likewise deteriorating. A ongoing stalemate with Moscow over natural gas supplies to the continent has heightened the likelihood of a significant slowdown. The International Monetary Fund (IMF) has reduced the currency bloc’s growth Investors will be watching statements from ECB President Christine Lagarde, as well as the minutes of the bank’s April meeting, for more signs on thinking in the coming days. Lagarde has joined the chorus of policymakers calling for a rate rise as soon as July.
“I think it’s politically tough for many in the ECB to sound overly dovish, given that inflation has probably not peaked,” said Peter McCallum, a rates analyst at Mizuho International Plc. “Unless we see 50 basis point raises, it’s difficult for many hawks to surprise the market right now.”
Any further euro selloff that breaks through the January 2017 low of $1.0341 may set the currency up for more losses.prediction for 2022 to as low as 2.8 percent.
As a result, the European Central Bank (ECB) is treading a fine line. It must weigh the necessity for stricter policy to contain record inflation against the economic harm that might result, particularly in some of the region’s most indebted member nations, such as Italy. While policymakers may boost rates above zero before the end of the year, additional increases seem unlikely.
With the region’s bonds being dumped as well, the currency market may begin to factor in eurozone debt problems, according to HSBC Holdings Plc strategists including Dominic Bunning. For the first time since the pandemic’s early days, the margin between Italian and German yields surpassed 200 basis points this month.
Not everyone is pessimistic. According to Roberto Mialich, a currency analyst at UniCredit SpA, the euro will rise back above $1.10 in the coming year as the Fed’s rate hike cycle slows. He sees a sustained below-parity situation as a tail risk, and only if eurozone GDP slows significantly more than expected.
However, as long as risk assets remain fragile, conventional safe havens such as the dollar and the yen will remain popular. Russia’s war in Ukraine is also a significant headwind for the euro, especially given the possibility of more delays in gas supply.
“The euro has already received more downward pressure than we expected, but we find it difficult to see a silver lining for the single currency at this time,” HSBC analysts said in a note, referring to lower GDP estimates and higher inflation expectations. “This is a poisonous concoction for any currency to try to absorb.”