Euro and USD Reach Parity
The USD and EUR are nearing parity for the first time in two decades. This morning, 1 euro was trading for around $1.05, having seen a steady drop for almost a year, CNBC reported.
The USD has been supported as a safe haven due to risk aversion and concerns about rising inflation, Russia’s war in Ukraine, slowing growth, supply chain problems, and tightening monetary policy.
Another factor for the soon-to-be parity is divergence in monetary policy among central banks. Earlier this month, the U.S. Federal Reserve increased benchmark borrowing rates for the second time this year.
Fed continues to raise rates, ECB hesitates
On Tuesday, Fed Chairman Jerome Powell said he would continue raising rates until the Fed brings inflation under control, repeating the pledge to bring it closer to the Fed’s 2% target.
By contrast, the European Central Bank (ECB) is hesitating to raise interest rates despite record inflation in the Eurozone. According to ECB policymaker Francois Villeroy de Galhau, a weak euro is a risk to price stability in the bloc, raising the cost of import goods denominated in dollars.
Sam Zief, an expert with JPMorgan Private Bank, told CNBC in an interview on Wednesday:
The path to parity would require a downgrade in growth expectations for the euro area relative to the U.S., akin to what we got in the immediate aftermath of the Ukraine invasion. Is that possible? Sure, but it’s certainly not our base case, and even in that case, it does seem like euro at parity becomes your worst case scenario.
He pointed out that the Fed’s interest rate hike series is factored into the dollar. Stephen Gallo of BMO Capital Markets agrees. He wrote in an email to CNBC:
It’s also the evolution of the EUR’s core balance of payments flows, and the prospect of additional negative energy supply shocks, which are also dragging the currency lower. We have not seen evidence of a large build-up in EURUSD short positions on the part of leveraged funds in the data we track, which leads us to believe that the EUR is weak because of a deterioration in underlying core flows.
Deutsche Bank executive: The dollar is too high
Since the beginning of 2022, the dollar index has gained around 8%. On Tuesday, Deutsche Bank said the risk premium priced into the dollar was at the “upper end of extremes.”
According to Deutsche Bank executive George Saravelos, we will soon see a turning point. In his opinion, deepening financial deterioration would “undermine Fed tightening expectation.” The rest of the world, especially Europe, needs to catch up with the tightening. Saravelos said:
We don’t believe Europe is about to enter a recession and European data – in contrast to the consensus narrative – continues to outperform the U.S. The dollar is too high.