It is an interesting time for forex traders, as the Euro and US Dollar are near parity once again. It would be the first time for such a level to be reached in nearly two decades. Although there is still a tiny gap, things certainly look rather interesting.
Euro and US Dollar Inch Closer
There have been times throughout history when the Euro and US Dollar neared parity. Unfortunately, it never got to that level, as the greenback often tends to strengthen during such times. This time may prove different, following the recent five-year low euro-to-dollar ratio of $1.03. That trend confirms the greenback has lost some appeal as a haven from market turmoil and geopolitical tension.
Unsurprisingly, hedge funds expect this parity to materialize relatively soon. Options wagers on parity between the two currencies has become the most popular trade among speculators. Even though the Euro is far from an attractive currency today, the US Dollar is weak and will likely continue to weaken in the next few months. Furthermore, global risk aversion remains a concern, as are the Fed’s bigger-than-normal interest rate hikes.
Unfortunately, the European economy will likely see its own issues. The standoff over natural gas distribution from Russia will likely lead to an economic slowdown. Although the European Union will still note growth this year, the forecast looks pretty bleak. That, in turn, poses new challenges for the ECB, as it balances rampant inflation with a tighter policy and works on future interest rate hiking.
Mizuho International Plc’s Peter McCallum adds:
“I think it’s politically difficult for many in the ECB to sound too dovish, considering that inflation has likely not yet peaked. Unless we get 50 basis-point hikes being talked about, it’s tough for many of the hawks to surprise the market now.”