Europe's single currency has dropped below parity against the dollar for the first time in almost 20 years, battered by growing recession fears in the euro area.
It started the year on a strong note before the war in Ukraine fuelled inflation and hurt the bloc's growth outlook.Here's an outline of the significance of the move.Since its birth in 1999, the single currency has spent very little time below parity. In fact, the previous time it did so was between 1999 and 2002, when it sank to a record low of $0.82 in October 2000. Euro banknotes and coins were only introduced on Jan.
The European Central Bank is expected to start hiking rates at its July 21 meeting. The Federal Reserve hiked rates by 75 bps in June. One favourable factor for the euro is that shorting the currency is already a popular trade in currency markets right now and bearish positioning is approaching historical levels. That might prevent the euro from falling sharply.A big headache. Letting the currency fall would push up already record high inflation, raising the risk of price growth becoming entrenched at a rate well above the ECB's target of 2%.
Studies frequently cited by the ECB suggest that a 1% depreciation of the exchange rate raises inflation by 0.1% over one year and by up to 0.25% over three years.The ECB has so far played down euro weakness, arguing that it has no exchange rate target, even if the currency does matter as part of the wider inflation calculations
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