Wed, December 07, 2022

Euro on a Highway to Hell, Here Is What You Need to Know

Euro

Sterling was in trouble and the euro dropped to below 99 cents for the first time in nearly two decades on Monday. The fall was due to worries about rising energy costs and economic growth raised by Russia’s shutdown of its main gas pipeline to Europe.

 

In Asian trading, the euro fell to $0.9880, its lowest level since 2002, while the pound touched a new 2-1/2-year low of $1.14445 and held at its record low. The euro has the highest weighting, surged to a peak of 110.25, setting a new record for the past two decades. Invoking an oil leak in a turbine, Russia postponed a Saturday deadline for the Nord Stream pipeline to begin carrying oil. It happened at the same time as the Group of Seven finance ministers announced a limit on Russian oil prices.

 

The pound has also been affected by worries about rising energy prices. If Liz Truss, the current foreign minister of the United Kingdom, wins the election to be the country’s next prime minister, she promised to take immediate action to reduce growing energy prices and boost the energy supply.

 

Here Is What Experts Think

Osamu Takashima, chief FX strategist at Citigroup (NYSE: C) Global Markets said that the future for natural gas in Europe cannot inspire confidence, which is bad for the euro. Much of it hinges on Putin.

 

According to Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore, the first-order effect seems to be that the increased geopolitical risk and accompanying unfavorable global demand shocks would probably be the consequences dominating.  One would have thought that the euro would benefit in some way from a hawkish ECB.

 

However, you could instead experience the policy tradeoff and dilemma biting in the safe demand for the U.S. dollar will likely be triggered by adverse demand shocks in a highly unfavorable geopolitical climate, with European currencies perhaps taking the worst blow and being put on the defensive.

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