Euro slumps to two-decade low as recession fears grow
* Euro at lowest level since end of 2002
* Dollar rises on safe-haven demand
* Yen sinks near 24-year lows again
By Herbert Lash
NEW YORK, 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 1.6% at one point and the euro EUR=EBS fell as much as 1.75% to lows last seen in late 2002. It was the biggest single-day decline for the euro and the dollar's largest one-day gain since COVID-19 roiled markets in March 2020.
Other currencies also tumbled as recession fears tanked stocks in Europe and initially 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 tumbled more than 2% as gas workers went on strike, adding to European growth concerns.
The risk of Europe sliding into a recession rose after a 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 hit out on Monday at ECB plans to try to shield highly indebted countries from surging borrowing rates.
A risk-off mood prevailed in markets as an energy crisis looms in Europe, said Bipan Rai, North America head of FX strategy at CIBC Capital Markets in Toronto.
"The threat of a recession in the euro zone is a more clear risk now relative to before," Rai said.
Traders told Reuters of a major dollar order in early London trading that sparked a chain reaction and sped the euro's drop as it broke through its 2017 low to tumble 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.
"We have a central bank that seems to be a gazillion miles behind the curve and more concerned about growth than inflation," Axel Merk, president and chief investment officer of Merk Investments, Palo Alto, California, said of the ECB.
"None of the central bankers, including (ECB President Christine) Lagarde, will say that maybe something is wrong with their approach."
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.
Sterling slumped against to a two-year low against the dollar on Tuesday as a crisis in British Prime Minister Boris Johnson's government added to pressure on a currency already reeling from recession fears and a resurgent greenback. By 1930 GMT it was trading 1.25% lower at $1.195 GBP=D3.
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.
The dollar's strength nudged the yen down toward a 24-year low, before paring some declines. It was last at 135.705 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 3:51 PM (1951 GMT) Description
U.S. Close Pct Change
+106.7900 +105.0400 Euro/Dollar
+136.3550 +135.5200 Euro/Yen
+142.3700 +138.9600 Dollar/Swiss
+0.9594 Sterling/Dollar GBP=D3
+$1.1899 Dollar/Canadian CAD=D3
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 Sinéad
Carew in New York, Marc Jones in London, Danilo Masoni in Milan
and Sruthi Shankar; Editing by Bernadette Baum, Angus MacSwan,
Deepa Babington and Mark Heinrich
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.