The euro on Tuesday (12) reached parity with the dollar for the first time in two decades, affected by the threat of cutting Russian gas supplies to the European Union. Investors favor the U.S. currency, considered a safe haven value, which appreciated 14% since the beginning of the year and reached trading at one dollar per euro at 9:50 GMT (6:50 Brasília), the highest rate against the European currency since December 2002.
Read also: The consequences of the euro’s fall against the dollar
The market fears a worsening energy crisis in Europe due to the interruption of the flow of Russian gas arriving through the Nord Stream 1 pipeline, currently under maintenance. The tension is fueling fears of a recession in Europe.
Gas from Russia is at the “center of the storm in Europe” and Saturday’s announcement that Canada will return turbines to Germany to ease the energy crisis with Russia “did not have a positive impact,” said analyst Jeffrey Halley of the Oanda firm.
Russian group Gazprom began maintenance work on Monday on the Nord Stream 1 pipeline, which carries gas directly from Russia to Germany. European countries are waiting to see whether Moscow will restore supply after the work, scheduled to last 10 days. “The key question is whether gas will return after July 21. The markets seem to have already made up their minds,” Halley said.
For Mark Haefele, an analyst at UBS, a suspension of Russian gas supplies in Europe “would trigger a euro zone-wide recession with three consecutive quarters of economic contraction.”
Read also: Euro hits 20-year low against dollar on recession risk
A recessionary scenario would make the work of the European Central Bank (ECB) more difficult should the institution wish to end its expansionary monetary policy and move to a contractionary phase to combat worsening inflation.
At the same time, the Federal Reserve (Fed, the U.S. central bank) has more leeway to continue raising rates, as employment figures released on Friday proved that the U.S. economy is more resilient at the moment.
Safe haven value
The euro’s fall may continue in the coming weeks. Inflation data in Germany, France and the United States may fuel investor concern on Wednesday.
Read also: Europe stocks steady as eurozone inflation hits record high
“If inflation in the United States is higher than the market expects, this could benefit the dollar as investors bet that the Fed will have to follow through even faster to raise rates,” said Fawad Razaqzada, analyst at Forex.com. The euro registered a slight rise after reaching parity with the dollar and at 10:10 GMT (7:10 Brasília time) was trading at $1.0024.
The dollar is also experiencing an appreciation in comparison to other currencies considered vulnerable to risk. The price of the British pound fell to US$1.1807, a level that has not been recorded since March 2020, when the beginning of the new coronavirus pandemic in Europe, during the Brexit negotiations, caused the British currency to fall to its lowest value since 1985.
