Euro falls to below 99 cents to the US dollar

The euro fell to below 99 cents against the US dollar in early trading on Monday, the steepest decline in two decades as the energy crisis in Europe compounds the effects of surging inflation.

The single currency, which came into physical circulation in 2002, was trading at $0.9886 against the greenback at 9.25am UAE time.

The euro has been trading below or near parity for the past two weeks. It has dropped more than 12 per cent against the dollar this year, dragged down by historically high inflation, low consumer confidence and an energy crisis amid a face-off between Europe and Russia over Moscow's war in Ukraine.

On Friday, Russia's state energy company Gazprom said it would halt supplies to Europe via the Nord Stream 1 pipeline indefinitely.

The announcement came after G7 member countries said they aimed to enforce a price cap on Russian oil to reduce Moscow's revenue and crimp its ability to finance its war in Ukraine, which is now in its seventh month.

“The energy situation in Europe was already looking parlous for households and businesses this winter, and now looks even worse following Russia’s announcement on Friday that the Nord Stream 1 pipeline would be closed indefinitely,” said Daniel Richards, an economist at Emirates NBD.

In 2021, EU members imported 155 billion cubic metres of natural gas from Russia, which accounted for about 45 per cent of the bloc's gas imports and close to 40 per cent of its total gas consumption, according to the International Energy Agency.

Rising energy prices have pushed inflation in the euro area to a record 9.1 per cent in August, from 8.9 per cent in July, according to flash figures from Europe’s statistics office Eurostat.

Inflation is a major concern for the European Central Bank, which raised interest rates by 50 basis points to zero on July 21 — its first rate increase in 11 years.

The ECB is expected to raise rates by a similar or greater amount on September 8.

“This week is important for euro traders … many traders now expect a 75 basis point rate hike from the ECB this week while some continue bet on a 50 bps hike, on the idea that the ECB cannot carry on jumbo rate hikes, when the eurozone is threatened by [a] deepening energy crisis and a sharp fall in economic activity,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.

“But the eurozone is also struggling with skyrocketing inflation, argue the hawks.”

Last week, the Institute of International Finance said it expected the euro's decline against the US dollar to continue amid record inflation, an energy crunch in Europe and a looming recession.

“Markets are increasingly focused on recession, however, and we think — if the ECB does choose to hike 75 bps in September — they may look through ECB tightening and switch to pricing policy rate cuts further out, much as they have been doing for the Fed,” the IIF said.

“As a result, it is unlikely that ECB hiking will prevent the euro from falling further, not least since speculative positioning remains close to flat for the single currency. The euro is, therefore, likely to keep falling.”

Critics said the ECB was behind the inflation curve and playing catch up, as they cited weak economic indicators.

On Thursday, the latest data showed that Germany's manufacturing sector remained in contraction territory in August, with the S&P Global/BME purchasing manager's index falling to 49.1, from 49.3 in July, due to a decline in factory activity in Europe's biggest economy that was caused by a sharp decline in new orders.

The eurozone area is not expected to avoid a recession, given the deterioration in economic indicators, with growth estimated at 1 per cent in 2022, the IIF said.

It said the sharp deterioration in the eurozone trade balance reflected the immediate hit from the large rise in energy prices, and that the bloc's reliance on cheap Russian energy required “a retooling of the eurozone growth model, [which] will take time and weigh on growth in coming years”.