- Traders bet on tough stance on interest rates
- Europe's economy crippled by high energy costs
- Forecasters see further downside for single currency
Investor appetite for the US dollar shows no sign of easing in the run-up to the Jackson Hole gathering of central bankers and finance ministers later this week.
A combination of traders increasing their bets on US interest rates staying higher for longer and a steadily worsening outlook for the European economy due to soaring gas prices has pushed the euro below parity against the dollar for the first time in 20 years.
SAFE HAVEN
Historically, in times of crisis, investors have sought sanctuary in the strength of the US dollar as the world’s ‘reserve currency’.
However, for most of the last decade the dollar has rarely strengthened beyond $1.10 against the European single currency and even during the Covid pandemic it only advanced to $1.07 (in other words one euro was worth $1.07).
Now, with expectations growing that New York Fed chair Jerome Powell will signal a tougher stance on interest rates than the market may be hoping for at the annual symposium of central bankers at Jackson Hole which starts on Friday, demand for the dollar is stronger than ever.
At the same time, fears that Europe’s economy - which for many years has relied on cheap Russian gas to keep input prices low - will grind to a halt this winter have pushed the euro to its lowest level for decades.
As a result, the dollar is trading below parity against the euro - in other words one euro now is only worth $0.993.
MOUNTING PRESSURE
European industrial confidence, as measured by the S&P Global Flash Eurozone Output PMI published today, fell to an 18-month low in August with a reading of 49.2 against 49.9 in July.
The PMI or Purchasing Managers Index is a leading indicator of economic trends, with a reading below 50 suggesting a contraction in business activity while a reading above 50 suggests expansion (see here for an explainer on the importance of PMIs and how to read them).
The August Flash Eurozone Manufacturing PMI hit 49.7, its lowest since the pandemic, while the Flash Services PMI hit 50.2, still just about in expansion territory but the lowest reading in nearly 18 months.
Most concerning for data watchers was the drop in manufacturing output which fell for the third month running ‘and at a solid pace’ according to S&P Global.
Germany, which is more reliant on cheap imported Russian gas than other European countries, recorded its sharpest decline in output since June 2020, while activity in France decreased for the first time in a year and a half.
While German premier Olaf Scholz has vowed to wean the economy off cheap energy from Russia, European gas futures prices have hit unprecedented levels due to tight supplies and record buying.
This is leading analysts to speculate that the euro could fall even further, maybe to $0.95 or even $0.90, as winter approaches and European gas prices rise due to seasonal demand.
