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  • Writer's pictureanalysiswatch

Title: Big rate hike won't save euro as energy shock deepens

Sep 06, 2022 03:17AM ET

By: AnalysisWatch

The hit on the Eurozone economy and its currency from the deepening energy crisis is so serious that more aggressive monetary tightening by the European Central Bank will not help to halt the euro's decline.

On Monday, the euro fell below $0.99 for the first time since late 2002 after Russia halted natural gas deliveries through its main pipeline to Europe, sending energy prices soaring and heightening fears of a supply crunch.

The weakening currency will be the focus of the European Central Bank's meeting on Thursday, as a weak euro—down 13% in 2022—could worsen already record-high inflation through more expensive imports.

Some policymakers have said the bank should pay more attention to the euro than in previous periods of weakness, as the price of gas is set in dollars and a weak euro intensifies the effects of rising energy costs.

Money markets estimate an 80% probability of an overshooting 75 basis point rate hike this week, but analysts believe that will do little to help the currency.

On Monday, Goldman Sachs predicted the euro would weaken to $0.97 and stay there for the next six months as demand destruction caused by the gas crisis leads to a "deeper and more prolonged contraction."

Capital Economics revised its forecast to $0.90 for next year-down 9% from current levels.

For months, the euro has been inversely correlated with gas prices, meaning it tends to fall when energy prices rise. In 2022, natural gas prices rose 255%, and on Monday they jumped 30%.

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