How Low Can the Euro Go?

The euro earlier Friday traded at $1.0099, putting it within striking distance of parity, or equal value with the dollar. It recovered later to finish the day at $1.0188. A day earlier it settled at $1.0162, its lowest closing level since December 2002.

Europe’s common currency has fallen more than 10% this year as the European economy faces an energy crisis brought on by Russia’s war in Ukraine that threatens to drive the bloc into recession.

Adding to pressure on the currency, the European Central Bank is trailing the U.S. Federal Reserve’s aggressive plans to lift interest rates, which have boosted the dollar against its peers.

Reaching parity won’t trigger any specific consequences for markets or the economy. But one euro being worth less than one U.S. dollar symbolizes the different economic fortunes on both sides of the Atlantic and could force European officials to reassess how aggressively to raise rates.

For much of this year, traders and strategists have been betting on the possibility of parity, even though it remained a ways off. But fears over soaring natural-gas prices pulled the euro below $1.035 this week, a low last seen in 2017, clearing out automated trades set up around that level. 

James Athey,

investment director at

Abrdn,

said he thinks the euro will fall to around 97 U.S. cents, and sees even steeper declines as possible in the short term.

“I don’t discount the idea that it could trade below 90” U.S. cents per euro, he said.

Deutsche Bank

analysts estimate the euro could fall to between 95 and 99 U.S. cents per euro after breaching parity. Their analysis looked at how the currency pair reacted in the past to factors such as interest-rate increases or previous periods of economic and market stress.

“A break below parity would signal the market pricing in an imminent recession in the eurozone as well as large negative terms of trade effects due to the energy crisis,” said

George Saravelos,

global head of foreign-exchange research at Deutsche Bank.

The euro’s slide will have ripple effects on global economies, corporate earnings and consumers’ wallets. For Americans traveling abroad this summer, a weak euro means their dollars can go further. But for U.S. companies, a weak euro can be a headache, making it harder to compete in export markets. Companies in the S&P 500 generate about 14% of their revenue from Europe,

FactSet

data show.

For the eurozone, the effects are particularly acute. A weaker euro compounds Europe’s inflation pressure by making imports—particularly of key commodities—more expensive. And unlike in the past, the weaker euro isn’t expected to provide much of a boost to the bloc’s manufacturers by making exports more attractive abroad. 

“Theoretically it helps the exporter side of the equation, like in Germany, but they’re having supply chain issues and gas supply issues,” said

Brad Bechtel,

global head of foreign exchange at Jefferies. 

Germany this week reported its first trade deficit since 1991. Exports from Europe’s manufacturing powerhouse fell in May despite the euro’s weakness.

A weaker euro can make euro-denominated assets—such as stocks—less attractive. The benchmark Stoxx Europe 600 index has fallen 14% this year, less than the 18% fall in the S&P 500. But in dollar terms, it has fallen further than the U.S. index.

“At the margin it just makes European investments less desirable,” Mr. Athey said. “As a vote of confidence, if there was an international price for an economy, it would be its currency. This does tend to be a flashing warning sign for foreign investors.”

Not all investors and strategists are convinced the euro may plunge below parity.

Viraj Patel,

a global macro strategist for Vanda Research, said he sees parity as the bottom of the euro’s slide. 

“What takes us down to 95 [cents] or levels like that is really a big crisis in Europe,” he said, noting he believes the continent’s energy troubles have already been priced into the euro’s fall. 

A slide below parity will be a “problem for the ECB,” he said, and could change the central bank’s timeline for monetary tightening. Still, he said, “I wouldn’t be buying the euro right now.”

Write to Chelsey Dulaney at [email protected] and Caitlin McCabe at [email protected]

Corrections & Amplifications
The chart accompanying this article shows how many U.S. dollars one euro is worth. An earlier version of the chart stated it showed how many euros one U.S. dollar is worth. An earlier version of the article also incorrectly referenced the euro’s value per U.S. dollar instead of the U.S. dollar’s value per euro.(Corrected on July 8).