The euro fell to a 20-year low against the US dollar on Tuesday as fears about the European economy weighed heavily on the currency. It was one of many signs of renewed economic concerns around the world, also reflected in shaky stocks, bond warning signs and sharp falls in oil prices.
The S&P 500 rose slightly on Tuesday, recovering from a much deeper decline earlier in the day.
The yield on the US 10-year Treasury, an important measure of borrowing costs, fell below the two-year yield, which stood at about 2.8 percent. The so-called inverted yield curve is a rare phenomenon that often occurs before a recession.
Economists have recently raised the possibility of a recession in their forecasts. Interest rates in the United States have seen their biggest rise since 1994, inflation is at a 40-year high and financial markets set grim records in the first half of the year.
In Europe, the unrest in the energy sector and the war in Ukraine weigh heavily on the region. Germany reported its first monthly trade deficit since 1991. Supply chain tensions are expected to slow down and even trigger a recession in the eurozone’s largest economy, which is heavily dependent on exports. “In general, we think the outlook is deteriorating quickly,” Daniela Ordonez of Oxford Economics wrote in a note on the euro-zone economy on Tuesday.
Another sign of concern about global growth was seen in the price of oil. Brent oil, the international benchmark, fell more than 9 percent on Tuesday to $103 a barrel, its biggest daily drop since March. West Texas Intermediate, the US benchmark, fell nearly as strongly, dropping below $100 a barrel for the first time since May.
The euro’s decline brought it closer to parity with the dollar, with one euro trading for about $1,027, the lowest level since 2002. Many analysts have said it is only a matter of time before the euro hits a one-to-one basis. -one exchange rate reached with the dollar as European economies struggle with high inflation, labor unrest and turmoil in energy markets.
“Europe is the weakest link in the global economy,” said Joe Quinlan, head of market strategy for Merrill and Bank of America Private Bank. “They are in the crosshairs of the war and the energy crisis.”
Russia has steadily curtailed supplies of natural gas to Western Europe, in what German officials have described as an economic attack in retaliation for sanctions and military aid to Ukraine, raising the specter of gas rationing if things get worse. Then, this week, energy workers in Norway, another key gas supplier in Europe, went on strike for wages, further limiting supplies and pushing up gas prices.
A potential power crunch led Jordan Rochester, a currency strategist at Nomura Securities, to predict that the euro would reach parity with the dollar in August, he wrote in a report on Tuesday, putting Germany’s large manufacturing base in particular at risk.
To curb the highest inflation since the introduction of the euro in 1999, the European Central Bank is expected to raise interest rates for the first time in more than a decade at its meeting this month.
But as the economic outlook for the eurozone darkens, investors are concerned that the ECB stepped in too late and may not have much time to raise interest rates before a recession forces it to change course. There are mounting predictions that the eurozone economy could slide into recession, especially if energy supply remains disrupted.
The Federal Reserve is expected to remain more aggressive in raising interest rates as it tries to cool economic growth and curb inflation, which would make holding dollar-denominated assets more attractive than euro-denominated assets, on top of concerns about the outlook for the eurozone economy.
“As the growth outlook weakens further, it appears that the window for ECB increases may close even faster than previously expected,” Dominic Bunning, head of foreign exchange research at HSBC, wrote in a research note Tuesday. That, he said, “represents a weak outlook” for the euro.
The euro’s decline is making imports more expensive for people and businesses in the 19 countries that use the currency, adding to the region’s inflation problems. It also reduces the value of European sales to US companies, presenting “an additional variable that investors should consider when it comes to profits,” said Mr. Quinlan of Merrill and Bank of America Private Bank.
The six months through Thursday were the worst first half of a year in the U.S. stock market since 1970, with the S&P 500 peaking in early January and falling nearly 21 percent through June. The sell-off was broad: every sector except energy went down. The second half of the year is just as bleak.
Eshe Nelson reporting contributed.
