Reuters: A deepening energy crisis hits the eurozone economy and currency so hard that ECB tightening won’t stop the euro’s decline.
The euro dipped below $0.99 for the first time since late 2002, when Russia froze natural gas supplies via Europe’s major pipeline, sending energy costs skyrocketing and raising fears of a supply shortfall.
A weak euro (down 13% in 2022) could exacerbate already-high inflation by raising import prices.
The ECB’s concern about inflation grows as the euro falls in value.https://fingfx.thomsonreuters.com/gfx/mkt/myvmnzggdpr/euro2.PNG
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Some policymakers say that the ECB needs to pay more attention to the euro than it did in the past when it was weak. This is because gas is paid for in dollars, and when the euro is weak, rising energy costs are made worse.
Money markets expect a supersized 75 basis point rate hike this week, but economists say it won’t boost the currency.
This rate hike won’t save the euro. Agnès Belaisch, a Barings Investment Institute strategist, predicts a recession and uncontrollable geopolitical problems. Inflation and recession are likely in 2023 if interest rates rise.
Also Related: After Nord Stream was shut down, Gazprom sent gas to Europe through Ukraine.
Goldman Sachs (NYSE:GS) predicts the euro will fall to $0.97 and stay there for six months due to the gas crisis’s demand disruption.
Capital Economics lowered its 2019 projection to $0.90, a 9% drop.
Since months, the euro tends to weaken when gas prices rise. On Monday, gas prices surged 30% after rising 255% in 2022.
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In August, euro zone business activity contracted for a second month.
Data implies speculators have increased their bets against the euro due to the energy shock.
Euro shorts grow https://fingfx.thomsonreuters.com/gfx/mkt/xmvjoallapr/euro1.PNG
UniCredit estimates that the EU imported 400 billion euros of oil and gas annually before COVID-19.
If oil prices stayed at $100 a barrel, the euro stayed at parity, and natural gas prices stayed at 100 euros, the cost would be 600 billion euros, or 6% of GDP, according to Erik Nielsen of UniCredit.
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Economists and currency specialists say economic hardship will be worse than expected.
“Euro zone narrative is evolving. Several months ago, it was “no recession.” Robin Brooks, head economist at the Institute for International Finance, tweeted Monday, “There’ll be a recession, but it’ll be shallow.” This weekend we made the ultimate shift: “We’re heading for a deep recession.” The euro will fall further.
Some suggest the ECB might halt euro depreciation with rate hikes in the coming months.
“The ECB can slow euro declines, but it’s not sure it can lead to lasting euro appreciation,” said Deutsche Bank’s George Saravelos (ETR:DBKGn).
Also Related: Factbox: Europe’s food sector is under pressure as CO2 reserves dwindle.
inflation pain
The euro has lost less than the dollar against other currencies, and sterling hasn’t been bolstered by more aggressive growth prospects.
A trade-weighted indicator watched by the ECB plummeted to its lowest level since February 2020 last month, but it was lower in 2015 and 2016 without ECB intervention.
Patrick Saner, head of macro strategy at SwissRe, says a dropping euro won’t significantly affect inflation. According to official numbers, a 10% drop in the nominal effective exchange rate of the euro causes 40–100 basis points of inflation a year later.
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“Even marginal consequences aren’t optimal,” says Saner.
European producer prices are growing due to energy-driven inflation.
Based on the consumer price index, the euro’s effective exchange rate is close to a record low, while the producer price index is close to a record high.
That means euro zone competitiveness is waning, which will affect the economy.
Also Related: The euro returns to parity as market optimism improves.
