Euro slides to 20-year low against dollar on fears of spiralling gas prices

One strategist said: "We have had so many central banks hiking in these big increments that you are now getting talk of reverse currency wars."

The euro is the latest major currency to suffer from the prospects that soaring inflation will lead to a sharp slowdown in economic activity in the eurozone. 

The euro fell against the dollar to its lowest for 20 years amid renewed fears that spiralling prices of European wholesale gas could tip major eurozone economies into recession. 

The euro traded at $1.028 and is predicted to fall further, bringing it ever closer to parity against the dollar.

Last week, sterling fell sharply against both the dollar and the euro on fears of a looming recession in Britain as the Bank of England hikes interest rates to counter flaring consumer prices.  

Now, the euro is the latest major currency to suffer from the prospects that soaring inflation will lead to a sharp slowdown in economic activity in the eurozone. 

Foreign exchange traders focused on European gas prices and the threat to future supplies from Russia, as well as surveys that showed a slowdown in the French services sector.                                                 

Traders were also selling the single currency because of the prospects the European Central Bank wouldn't increase interest rates as sharply as the US Federal Reserve and the Bank of England. For traders, the so-called interest rate differentials would make holding euros less attractive than holding the safe-haven dollar.                  

"A run of soft economic data and concerns about the outlook for European growth have hit the euro this morning, sending it to its lowest level against the US dollar since December 2002," said Adrian Finn at Bank of Ireland. 

"Volatility remains high and market sentiment is pessimistic, so a move to parity between the euro and the dollar could not be ruled out over the course of the summer," Mr Finn said. 

“Parity is just a matter of time now,” said Neil Jones, head of foreign exchanges sales to financial institutions at Mizuho.

Prices of European wholesale gas for delivery over the summer months and out to November rose at one stage by up to 4% on Tuesday to trade at €170 per megawatt hour, according to Dutch futures contracts. Prices through to April traded at multi-year highs of €133 per megawatt hour, before easing back.  

Governments, economists and financial markets have been watching the daily prices of European wholesale gas even before the February 24 invasion of Ukraine. Russia is  a key supplier of the fuel to households and businesses across Europe and has the power to turn down or off the gas taps. 

In a vicious circle, leading central banks around the world have already hiked interest rates to stop energy and food price inflation getting out of control, but the cure may also tip economies such as Britain, relatively more vulnerable because of Brexit, into recession. 

"It will continue to be very difficult for the euro to rally in any meaningful way with the energy picture worsening and risks to economic growth increasing notably," said MUFG's head of global markets research Derek Halpenny.

The heavy volatility in trading also saw the euro drop to the lowest against the Swiss franc since 2015. Sterling also fell against the dollar, to trade below $1.20 on economic woes. 

"We have had so many central banks hiking in these big increments that you are now getting talk of reverse currency wars," said Rabobank FX strategist Jane Foley, referring to where central banks need to hike rates just to stop their currencies from falling.

"It could get concerning" for a number of currencies, she added, especially if the US Federal Reserve pushes ahead with large rate hikes in the coming months as expected.

"The fear of recession is once again becoming stronger," said Stuart Cole, head macro economist at Equiti Capital.

Irish Examiner. Additional reporting Reuters