With a looming recession weighing down heavily on the European economy, the euro plunged to a 20-year low against the US dollar. The impending financial crisis was reflected in stock markets, while bonds flashed warning signals and oil prices fell sharply. But S&P showed resilience as it recovered from a much deeper slide earlier in the day.
Economists across the world have been raising the possibility of a recession in their forecasts. Inflation is at its highest in 40 years, as such, interest rates in the US experienced their largest increase since 1994. Financial markets have been setting grim records in the first half of the year (2022).
The euro is having the toughest time, slipping to its lowest level in two decades. It shed around 1.5% for the session to hit $1.0265 against the dollar; the dollar index gained 1.29% to 106.49. Moreover, inflation in the eurozone jumped 8.6% in June. This prompted the European Central Bank (ECB) to inform markets of its plans to hike interest rates for the first time in 11 years. But the central bank’s capacity to tighten the monetary policy may be limited due to growing fears of a recession. On Monday, the July Sentix Economic Index showed investor morale across the eurozone had dropped to its lowest level since May 2020 – indicating an “inevitable recession”.
This has also been abetted by skyrocketing gas prices. Plus, the ongoing Russo-Ukrainian war has added more fuel to the recession and falling currencies, western governments imposing sanctions on Russia, Moscow cut off gas supplies to Europe, and the continuing COVID-10 pandemic has all but created the financial crisis. European economies are struggling with high inflation, labor unrest (strikes) and volatility in energy markets. These factors have hit the euro hard. It has lost over 9% of its value against the US dollar since the beginning of 2022.
Analysts believe that it’s only a matter of time before the euro reaches a one-to-one exchange rate with the dollar. Joe Quinlan, head of the market strategy for Merrill and Bank of America Private Bank, described Europe as the weakest link in the global economy. He said the region has been caught in the war and the energy crisis. As such, investors fear that the European Central Bank moved too late and may not have much time to raise rates before a recession forces it to change its course.