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Title: Euro is at parity; its fate is now with energy markets

Jul 14, 2022 01:10AM ET

By: AnalysisWatch

The collapse of the euro below $1 for the first time in two decades puts it on track for one of the worst years in its history, especially if the energy shock triggered by the conflict in Ukraine leads the bloc into a prolonged economic crisis.

The single currency has teetered on the brink of parity against the greenback for days, finally breaking through that level on Wednesday.

The 11.8 percent drop since the beginning of the year is nearly equal to the losses seen in 2015, when the European Central Bank unleashed massive stimulus.

Wednesday's move may have opened the door for a move to $0.96, analysts predict, with some expecting a drop to $0.90 if gas supplies are disrupted further.

These actions put the ECB in a difficult position. It is expected to raise interest rates next week for the first time since 2011 to fight inflation, which is at a record high of 8.6%.

In the short term, it may all depend on technical factors and options markets, where traders bet on the direction of movement or hedge currency exposure.

Next week, $1 billion to $1.5 billion worth of options expire, and traders say a final and sustained break of parity will trigger sell orders on the euro, which could send them to $0.95.

It cut its target for the euro and dollar to $0.95, "reflecting that the market will become increasingly inclined to price in a greater likelihood of escalation."

Other things being equal, the euro would fall to $0.98 if gas reached 200 euros and would trade below $0.95 at 250 euros, they told clients.

The ECB could intervene by selling dollars to prop up the currency, as it did in 2000 when the euro fell to about $0.83.

But the bank has signaled that it may not intervene this time, probably because the euro's "real" exchange rate against the currencies of trading partners and adjusted for inflation is well above the level of 2002, when parity was last achieved between the euro and the dollar.

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