Zhitong Finance APP noticed that the euro against the US dollar has approached parity for the first time in 20 years.
It is understood that the euro fell to a five-year low of nearly $1.03 for a time. The main reason behind this is that market turmoil and the risk aversion boom caused by Ukraine-Russia conflict have caused funds to pour into the capital market in the United States. Companies such as HSBC and Royal Bank of Canada predict that the euro-dollar exchange rate will reach parity in 2022.
At the same time, some hedge funds have already bet on this. It is understood that in the past month, they have been evaluating the euro-USD exchange rate through foreign exchange options, involving a nominal principal of US$7 billion. Amid this wave, put options that bet heavily on the euro have become the most popular forex trading derivatives. “The euro is not attractive in itself at the moment,” said Francesco Pesole, a foreign exchange strategist at ING Groep NV. Although ING Groep maintains expectations of an EUR-USD of 1.05 in the next six months, Pesole acknowledged that a stronger dollar and market volatility meant that the EUR-USD exchange rate could eventually reach parity.
Demand for safe-haven assets is driving the euro to approach 1 dollar
In addition, the strengthening of the dollar has also largely caused the euro to weaken. The dollar is strengthening as the Fed raises interest rates more significantly than other countries.
As a new round of global risk aversion sentiment cooled the stock market and credit markets, investors increased their momentum to enter safe-haven currencies. At present, Europe's economic outlook is not optimistic. Russia continues to standoff with EU countries on the issue of supplying natural gas to the continent, which increases the possibility of gas supply disruptions. The International Monetary Fund has lowered its eurozone's economic growth forecast for 2022 to 2.8%.
The unoptimistic economic outlook has made the European Central Bank's policy implementation go on thin ice. It must balance tightening policies to curb record-breaking high inflation with the economic damage it may cause. While ECB officials are currently hinting that interest rates may be raised above zero by the end of the year, investors have questions about the possibility of further rate hikes on this basis. Investors will pay attention to the speeches of ECB President Lagarde and others in the coming days, as well as the minutes of the ECB's April meeting released on Thursday to keep an eye on the latest trends of the ECB.
Currently, Lagarde, like some other policy makers, suggests a rate hike will be raised as early as July. "I think it's hard for many ECB officials to be too modest in policy, given that inflation may not have peaked yet," said Peter McCallum, interest rate strategist at Ruisui International. "Unless policy makers talk about 50 basis points in interest rates, the hawkish remarks are hard to surprise the market now." HSBC strategist Dominic Bunning said that as bonds in the euro zone are sold, the forex market may start to consider the euro zone's debt risks. It is reported that this month, the interest rate spread between Italy and Germany, which is regarded as a risk indicator, exceeded 200 basis points, the first time since the early stage of the epidemic.
However, not everyone is negative about the euro. UniCredit SpA Forex strategist Roberto Mialich expects the euro-dollar exchange rate to climb above $1.10 next year as the Fed rate hike cycle gradually ends. He believes that the situation of continuing to fall below parity is only a tail risk (extreme risk), and it is only possible if the economic growth rate of the eurozone has declined far exceeding expectations.
Of course, as long as risky assets remain weak, traditional safe-haven currencies such as the US dollar and the Japanese yen will continue to be popular. At the same time, the Ukraine-Russia conflict remains the main resistance to the euro's strength, especially considering that natural gas supply may be further disrupted.
As of press time, the euro against the US dollar exchange rate is 1.0399.
