Euro slumps to two-decade low as recession fears grow



* Euro drops to lowest level since end of 2002

* Dollar rises on safe-haven demand

* Yen sinks near 24-year lows again

By Herbert Lash and Marc Jones

NEW YORK/LONDON, July 5 (Reuters) - Safe-haven demand strengthened the dollar on Tuesday to levels last seen in 2002 while the euro slumped to two-decade lows as the latest surge in European gas prices fueled recession concerns.

The dollar index =USD rose 1.5% and the euro EUR=EBS fell as much as 1.75% to lows last seen at the end of 2002. It was the biggest single-day decline for the euro and the dollar's largest gain since COVID-19 roiled markets in March 2020.

Other currencies also tumbled as recession fears tanked stocks in Europe and on Wall Street. Japan's yen JPY=EBS was near 24-year lows again, the Canadian dollar CAD= fell to almost 19-month lows and Norway's crown NOK=D3 fell more than 2% as gas workers went on strike, adding to European growth concerns.

The risk of Europe sliding into a recession rose after another big 17% jump in natural gas prices in both Europe and Britain looked set to push inflation even higher.

Concerns about how the European Central Bank will react eroded sentiment after German Bundesbank chief Joachim Nagel on Monday hit out at the ECB's plans to try to shield highly indebted countries from surging borrowing rates.

"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.

Traders told Reuters there had also been a major dollar order in early trading, perhaps as U.S. markets were closed on Monday for the Fourth of July holiday.

Coupled with energy price angst it caused a chain reaction, spilling into both equity and bond markets and then speeding the euro's fall as it broke through its 2017 low to fall to $1.0236.

The heavy volatility also saw the euro drop to the lowest level against the Swiss franc EURCHF= since the Swiss National Bank abandoned its currency cap in 2015. It fell against sterling too, although the pound's GBP=EBS own economic and political worries had left it below $1.20 again.

The euro's decline is just a warning sign as to what might happen later this month if Russian gas to Germany is shut off, a move that could push the currency to breach parity and fall toward $0.98 in August, said Nomura Securities.

With the euro near two-decade lows, volatility has jumped and trading in options has increased, said Marc Chandler, chief market strategist at Bannockburn Global Forex.

"Whether it is to play for the downside like a speculative move or whether it's a hedge against long euros, I can't tell you," Chandler said.

The Australian dollar fell despite the country's first back-to-back 50-basis point interest rate hike in recent memory overnight, which also cemented the fastest run up in rates there since 1994.

The Aussie AUD=D3 slid 1.4% to $0.677, after trading as high as $0.6895 earlier in the day. It is now down nearly 7% this year.

"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 U.S. Federal Reserve pushes ahead with large rate hikes in the coming months as expected.

The dollar's strength, meanwhile, nudged the yen back down toward a 24-year low. It was last at 135.825 per dollar. JPY=EBS

Eastern Europe was also feeling the heat as its countries are some of the most dependent on Russian gas. MSCI's main EM FX index hit its lowest since November 2020 with Euro-linked currencies such as the Hungarian forint HUF= , Polish zloty PLN= and Romanian leu RON= down 1.6-2.3% against the dollar.

Currency bid prices at 12:50PM (1650 GMT) Description

RIC

Last

U.S. Close Pct Change

YTD Pct

High Bid

Low Bid

Previous

Change

Session

Dollar index

=USD

106.7200

105.1200

+1.53%

11.558%

+106.7900 +105.0400 Euro/Dollar

EUR=EBS

$1.0240

$1.0421

-1.74%

-9.93%

+$1.0449

+$1.0236 Dollar/Yen

JPY=EBS

135.8100

135.7050

+0.07%

+17.96%

+136.3550 +135.5200 Euro/Yen

EURJPY=

139.07

141.39

-1.64%

+6.71%

+142.3700 +138.9600 Dollar/Swiss

CHF=EBS

0.9697

0.9608

+0.90%

+6.28%

+0.9704

+0.9594 Sterling/Dollar GBP=D3

$1.1916

$1.2102

-1.53%

-11.88%

+$1.2126

+$1.1899 Dollar/Canadian CAD=D3

1.3067

1.2859

+1.62%

+3.35%

+1.3083

+1.2844 Aussie/Dollar

AUD=D3

$0.6763

$0.6868

-1.43%

-6.86%

+$0.6895

+$0.6762 Euro/Swiss

EURCHF=

0.9930

1.0016

-0.86%

-4.23%

+1.0032

+0.9925 Euro/Sterling

EURGBP=

0.8590

0.8604

-0.16%

+2.26%

+0.8623

+0.8544 NZ

NZD=D3

$0.6135

$0.6209

-1.14%

-10.32%

+$0.6226

+$0.6125 Dollar/Dollar

Dollar/Norway

NOK=D3

10.1135

9.8555

+2.61%

+14.79%

+10.1155

+9.8220 Euro/Norway

EURNOK=

10.3596

10.2317

+1.25%

+3.46%

+10.3735

+10.2320 Dollar/Sweden

SEK=

10.5400

10.3369

+0.23%

+16.88%

+10.5461

+10.3026 Euro/Sweden

EURSEK=

10.7923

10.7670

+0.23%

+5.46%

+10.8105

+10.7519



World FX rates Link
Euro slumps to lowest since 2002  Link
Europe's natural gas imports from Russia Link



Reporting by Herbert Lash, Additional reporting by Marc Jones
in London, Danilo Masoni in Milan and Sruthi Shankar; Editing by
Jacqueline Wong, Bernadette Baum, Angus MacSwan and Deepa
Babington

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