Title: Euro bounces off lows but heads for big weekly loss

May 13, 2022 04:51AM ET

By: AnalysisWatch

The euro was able to break away from its five-year low on Friday and rise back above the $1.04 mark.

However, it faces a big weekly loss after Russia's decision to cut gas supplies to Europe revived fears of an economic slowdown in the euro zone.

The common currency has been heavily weighed down in recent weeks by a combination of fears that the economy could suffer from the fallout of the war in Ukraine and a huge rise in the dollar fueled by bets that the U.S. Federal Reserve will make a series of large interest rate hikes to curb inflation.

While investors expect the European Central Bank to raise interest rates from negative territory this year, eurozone yields will lag well behind those in the United States.

On Thursday, the euro fell as low as $1.0354, its lowest level since early 2017, and recovered to $1.0413 in early Friday trading, but few analysts believe the bounce is sustainable. The euro has fallen 1.3% against the dollar this week.

"In the short term, it's difficult to see what will reverse the euro's downtrend against the dollar," said Lee Hardman, currency analyst at MUFG. Hardman expects the euro could fall below parity with the dollar within weeks or even days due to more bad news.

Until the risks related to Ukraine diminish, it will be very difficult for the euro to go much higher.