The euro and the dollar reach parity for the first time in 20 years

New York ( Business) — For the first time in 20 years, the exchange rate between the euro and the US dollar reached parity, meaning that the two currencies are worth the same.

The euro hit $1 on Tuesday, down 12% from the start of the year. Recession fears abound on the continent, fueled by high inflation and uncertainty in energy supplies caused by the Russian invasion of Ukraine.

The European Union, which received about 40% of its gas through Russian pipelines before the war, is trying to reduce its dependence on Russian oil and gas. At the same time, Russia cut gas supplies to some EU countries and recently cut flow in the Nord Stream pipeline to Germany by 60%.

Now that critical piece of Europe’s gas import infrastructure has been shut down for scheduled maintenance due to the last 10 days. German officials fear it will not reignite.

The energy crisis is accompanied by an economic slowdown, which has raised questions about whether the European Central Bank can adequately tighten policy to reduce inflation. The ECB announced that it will raise interest rates this month for the first time since 2011, as the eurozone’s inflation rate stands at 8.6%.

But some say the ECB is way behind the curve, and a hard landing is all but inevitable. Germany posted its first goods trade deficit since 1991 last week as fuel prices and general supply chain chaos pushed up the price of imports significantly.

“Given the nature of Germany’s exports, which are sensitive to commodity prices, it remains difficult to imagine that the trade balance could improve significantly from here in the coming months given the expected slowdown in the eurozone economy.” , currency strategists at Saxo Bank wrote in a recent note.

A series of aggressive interest rate hikes by central banks, including the Federal Reserve, coupled with slowing economic growth will keep pressure on the euro and send investors toward the US dollar as a safe haven, say investors. analysts.

The US Federal Reserve is far ahead of Europe on tightening measures, raising interest rates by 75 basis points and signaling more rate hikes this month.

This safe-haven retreat into the US dollar could become even more extreme if Europe and the US slip into recession, George Saravelos, global director of currency research at Deutsche, warned in a note last week.

A situation in which the euro trades below the US dollar in a range of US$0.95 to US$0.97 could “well be achieved,” Saravelos wrote, “if both Europe and the US find themselves slipping into a (deeper) recession in the third quarter while the Fed continues to raise rates.”

That’s good news for Americans planning to visit Europe this summer, but it could spell bad news for global economic stability.