The euro fell to a two-decade low on Tuesday as the latest surge in European gas prices contributed to the region’s recession concerns and a surge in U.S. treasury yields tore the dollar apart again.
Many currencies were under pressure. The euro’s decline of 1.2% EUR = EBS took it to its weakest since the end of 2002. Japan’s yen JPY = EBS was again close to 24-year lows, while Norway’s krone tumbled 1.2% when gas workers went on strike .
Economists said the risks of Europe falling back into recession were growing clearly after another big 17% jump in natural gas prices in both Europe and Britain seemed to push inflation even higher.
Concerns about how the European Central Bank will react have been fueled by sentiment after Joachim Nagel, head of the German Bundesbank, hit the ECB’s plans to try to protect countries with large debt from rising lending rates.
“It will continue to be very difficult for the euro to recover in any significant way with the energy picture deteriorating and risks of economic growth significantly increasing,” said MUFG’s head of global market research, Derek Halpenny.
Frontline traders who spoke to Reuters said there was also a large dollar order in early trading, perhaps because U.S. markets were closed Monday for the 4th of July holiday.
One said that together with the energy price fears it caused a chain reaction, which washed out to stock markets and bond markets and then accelerated the euro’s fall when it broke through its 2017 low of $ 1.0340.
The large volatility also led to the shared currency falling to the lowest against the Swiss franc EURCHF = since the Swiss National Bank dropped its currency limit in 2015. It also fell against sterling, although the pound’s GBP = EBS own economic and political concerns left it. again below $ 1.20.
Even the Australian dollar stumbled badly despite the country’s first back-to-back rate hike of 50 basis points in recent memory overnight, which also confirmed the fastest rise in rates there since 1994.
The Aussie AUD = D3 swung 1% lower to $ 0.6787, after trading as high as $ 0.6895 earlier in the day. It is now almost 7% lower this year.
“We have had so many central banks stepping into these big increments that you are now talking about reverse currency wars,” said Jane Foley, Rabobank FX strategist, referring to where central banks should raise rates just to stop their currencies from falling .
“This could be worrying” for a number of currencies, she added, especially as the US Federal Reserve continues to make major rate hikes in the coming months as expected.
The dollar’s strength has meanwhile pushed the yen back to a 24-year low. It was last at 135.79 per dollar.
Eastern Europe also felt the heat as its countries are among the most dependent on Russian gas. MSCI’s main EM FX index hit its lowest since November 2020 with Euro-linked currencies such as the Hungarian forint HUF =, Polish zloty PLN = and Romanian leu RON = 1.6-2.3% lower against the dollar.
“The fear of recession is getting stronger again,” says Stuart Cole, chief macroeconomist at Equiti Capital.