The euro’s fall to a five-year low is reigniting the prospect of the currency hitting parity against the dollar for the first time in two decades, as fears of a bloc-wide economic recession encourage investors to bet on the currency’s bearish. ordinary.
With the single currency hitting a floor of $1.0514, deepening April losses to 4.5%, some high frequency financial and economic indicators are flashing red.
Further downside is likely, said Vasileios Gkionakis, head of G10 FX strategy for Europe, Middle East and Africa (Emea) at Citi, adding that “speculative positioning is much cleaner than before, suggesting room for an accumulation greater number of selling positions”.
A switch to the euro-dollar peg will not be straightforward, however, with currency traders facing some tough technical barriers.
The euro’s decline would still be limited by sizable options contracts around the early 2017 low of $1.0340 and then the $1.02 level last hit in December 2002, according to two operators.
Rapid moves could also call for ECB intervention, last seen in 2000 and 2011, especially if the euro’s weakness causes bond market turmoil in more fragile countries such as Italy.
Thus, few banks are willing to predict that the euro-dollar parity will be reached. HSBC, for example, says the $1.0341 level of early 2017 could appear “if macropolitical challenges don’t subside”.
Rabobank said it would reconsider its forecast for the euro at $1.10, viewing the dollar “stronger for longer” but expects “the euro-dollar peg to be avoided” if power outages are circumvented and the tightening of monetary policy by the ECB remains ongoing.