Euro falls back towards 2017 lows on Russian energy crisis

The euro hovered near its weakest point since early 2017 on Friday after Russian sanctions led to disruptions in gas supplies to Europe, renewing fears about an economic slowdown in the euro zone.

The single currency has been battered in recent weeks by a combination of fears for the economy suffering from the fallout of the war in Ukraine, and a huge rally in the U.S. dollar fuelled by bets the Federal Reserve will deliver a series of big interest rate hikes to tame inflation.

While investors expect the European Central Bank to lift rates out of negative territory this year, yields in the euro zone will lag the United States by a significant margin. Predictions from investors and analysts that the euro could fall to parity with the dollar are growing louder.

On Friday, the euro ceded earlier gains to drop 0.1% to $1.0373, close to the $1.0354 level it hit on Thursday, its lowest since early 2017. The euro is down 1.6% versus the dollar this week.

“In the very short-term, it’s difficult to see what is going to turn around the euro/dollar bearish trend,” said Lee Hardman, a currency analyst at MUFG. Hardman reckons the euro could fall below parity with the dollar within weeks or even days on the back of more bad news.

“Unless the Ukraine risks start to recede, it is going to be very difficult for the euro to move much higher.”

Russia on Wednesday imposed sanctions on European subsidiaries of state-owned Gazprom (MCX:GAZP). Germany, Russia’s top client in Europe, said some subsidiaries of Gazprom Germania were receiving no gas because of the sanctions.

Barclays (LON:BARC) strategists said that if Russia switches off the gas taps, they expect euro/dollar will fall below parity.

“Our economists estimate that a total loss of Russian supplies, combined with rationing of the remainder, could dent euro area GDP by more than 5pp (percentage points) over one year,” the strategists wrote in a research note.

The dollar index rose 0.1% to 104.82, close to Thursday’s two-decade high of 104.92.

The rally in the dollar, aided by a flight-to-safety bid by investors concerned about inflation and economic uncertainty, has hit most major currencies. But the Japanese yen looked set to snap a nine-week losing streak.

The dollar regained 0.5% on the yen to 128.89 per dollar after hitting a two-week low of 127.5 overnight. However, the dollar is still down against the yen this week, its first week of declines since early March.

Sterling fell 0.2% to $1.2176. The pound was knocked by data on Thursday showing Britain’s economy unexpectedly shrank in March.

The Australian dollar rallied 0.2% to $0.6869 as broad investor risk appetite improved.

Crypto markets were steadier on Friday after a week of turmoil, as the risk-off mood combined with the spectacular collapse of stable coin TerraUSD.