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Wednesday, September 28, 2022

Euro hits 20-year low after Russia cut gas supplies

20220925 122644 1
20220925 122644 1

The euro drops to $0.9876 after Russia scrapped the Saturday deadline for resuming flows from the Nord Stream pipeline.

The euro fell below $0.99 – a new 20-year low – after Russia’s halt to gas supplies through its main pipeline to Europe heightened concerns about a worsening energy crisis across the region.

The euro has been increasingly correlated with natural gas prices in recent months, with the former falling when energy source prices rose.

Europe is scrambling to wean itself off Russian supplies and build up reserves before the cold winter months, but investors believe the blow to its economy will be huge.

Russia on Saturday canceled a deadline for the resumption of flows through its Nord Stream pipeline, citing oil leaks in turbines. This coincided with the announcement of the G7 finance ministers on the ceiling of Russian oil prices.

The euro fell to $0.9876 in early European trade on Monday, its lowest level since 2002, while the pound – with the British economy also exposed to rising gas prices – fell half a percent to a new two-and-a-half year low of $1.1444. .

“Gas flows have been reduced even more than expected, and we’ve already seen evidence of demand destruction weighing on activity,” said Michael Cahill, Goldman Sachs strategist.

“We now expect the euro to fall further below parity ($0.97) and to remain near that level for the next six months,” he added.

Gas pipes in Lubmin
Pipes in the landing facilities of the gas pipeline Nord Stream 1 [File: Hannibal Hanschke/Reuters]

In a huge week for the Euro, investors are also gearing up for Thursday’s European Central Bank (ECB) meeting and markets have priced in a near 80 percent chance of a 75 basis point (BP) rate hike. .

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European Central Bank officials will ensure the stability of the euro, which has lost 20 percent of its value in the past three months. This will fuel the desire to try to tame inflation by tightening policy.

Other currencies that tend to do poorly when market confidence is shaken also fell on Monday. The risk-sensitive Australian dollar fell 0.5% and approached a seven-week low of $0.6774.

The dollar’s allure as the currency of choice this year has helped it rise even against safe haven currencies. The Japanese yen fell to 140.35 against the dollar, and was under pressure near a 24-year low.

“The effect of the number one ranking appears to be that increased geopolitical risks and consequent negative shocks to global demand will likely be the dominant influences,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore.

“Adverse demand shocks in a very bad geopolitical environment are likely to result in, and reflect, safe demand for the US dollar… European currencies are perhaps the hardest hit and decline.

The offshore Chinese yuan fell to a new two-year low, with the dollar rising 0.4 percent to 6.9543 against the dollar, as concerns linger over the country’s COVID-19 lockdown measures.

Shenzhen, the technology hub in southern China, said it will adopt gradual restrictive measures to combat viruses starting Monday, while Chengdu announced an extension of lockdown restrictions, as the country grapples with the new outbreak.

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