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The euro sank today to its lowest level against the dollar since 2002 as data pointed to a growing recession risk in the euro zone.

The euro also dived as investors eyed aggressive interest rate hikes by the US Federal Reserve in its fight against inflation, in contrast with the European Central Bank which plans more modest increases.

The euro tumbled to $1.0306 this morning, threatening a push towards dollar parity for the first time since the euro’s creation in 1999.

Economic growth in the euro zone floundered in June, a key survey showed today, hit by soaring inflation.

S&P Global’s closely-watched monthly purchasing managers’ index (PMI), which measures corporate confidence, fell to 52 in June from 54.8 in May.

The reading, which was a 16-month low, however remains above the 50-point level signalling expansion.

Adrian Finn, from Bank of Ireland Markets and Treasury, said that volatility remains high and market sentiment is pessimistic.

“A move to parity between the euro and the dollar could not be ruled out over the course of the summer,” he added.

“Growing fears of a recession are hammering the euro lower, whilst the dollar is soaring on bets that the Fed will keep hiking rates aggressively to tame inflation,” City Index analyst Fiona Cincotta said.

“Today’s PMI data from Europe have highlighted the risk of slowing growth at the end of the second quarter and raise the prospect of a contraction in activity in the coming months,” she added.

Swathes of currencies were under pressure today.

Japan’s yen was near 24-year lows again, while Norway’s crown slumped 1% as its gas workers went on strike.

MUFG’s head of global markets research, Derek Halpenny, said the risks of Europe backsliding into a recession looked to be growing after another big 17% jump in natural gas prices in both Europe and in Britain.

Concerns about how the European Central Bank will react were also gnawing at sentiment after German Bundesbank chief Joachim Nagel had hit out at the ECB’s plans to try and shield highly indebted countries from sharp rises in borrowing rates.

“It will continue to be very difficult for EUR to rally in any meaningful way with the energy picture worsening and risks to economic growth increasing notably,” said MUFG’s Halpenny.

Even the Australian dollar failed to gain traction 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.

“We have had so many central banks hiking in these big increments that you are now getting talk of reverse currency wars,” said Rabobank FX strategist Jane Foley, referring to where central banks need to hike rates just to stop their currencies from falling.

“It could get concerning” for a number of currencies she added, especially if the US Federal Reserve pushes ahead with large rate hikes in the coming months as expected.

Article Source: Euro hits 20-year low against dollar on recession risk – RTE

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