Euro Hits Parity with the Dollar, as Financial Whiplash Wreaks Havoc in the Trans-Atlantic

July 13, 2022 (EIRNS)—The euro briefly fell under parity with the dollar today, dipping to $0.9998 against the dollar, and closed at 1.0024, nearly exactly parity. One year ago, the euro was at 1.20 to the dollar, which means it has dropped 17% in a year. “The euro’s downward spiral has been swift and brutal,” Bloomberg commented. Behind the dramatic plunge of the euro—which is only expected to worsen in coming days and weeks—are huge speculative flows leaving Europe and heading into the dollar from the carry trade of recent years, in response to the Fed’s aggressive raising of interest rates. Fools report this as a “strengthening” of the dollar; but it is actually only today’s financial whiplash as the whole bankrupt trans-Atlantic system disintegrates.

There is an agitated discussion underway among bankers over how low the euro will sink (0.95? 0.90?) in the months ahead, as the European physical economy is torn to shreds by the suicidal sanctions against Russia. For example, Citigroup analyst Tom Fitzpatrick told Bloomberg that he was “going all-in” on shorting the euro versus the dollar, expecting the euro to drop to 0.95 very soon.

CNBC quotes Jeremy Stretch, head of G-10 FX strategy at CIBC Capital Market, saying: “The ECB is in a very, very difficult position. You could argue that the ECB has been rather late to the party both in terms of ending their bond purchases but also considering monetary policy tightening.” CNBC wonders whether “the European Central Bank will be able to tighten monetary policy aggressively enough to rein in record-high inflation without deepening the economic pain.” So the race to the bottom is on. The ECB’s next rate-setting meeting is on July 21. The Canadian central bank raised interest rates by 1% today.

A second factor in the euro’s collapse is the prospect of a total cutoff of Russian natural gas exports to Europe. George Saravelos, global head of foreign exchange research for Deutsche Bank, told Bloomberg Surveillance that in the scenario of a “complete gas shutoff” from the Nord Stream 1 pipeline, his bank is pricing the euro to drop further. “I really wouldn’t say 0.95 would be unreasonable,” Saravelos said. “Even if this gas returns in terms of full flow after the maintenance period, the (risk) premium is unlikely to go away.”