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Euro risks slide to parity as ‘most liquid short’ in Ukraine war By Bloomberg

By on March 4, 2022 0

© Reuters. Euro risks slide to parity as ‘most liquid short’ in Ukraine war

(Bloomberg) — What seemed almost impossible a few months ago now turns into a sizeable risk: the euro could fall to parity with the dollar this year.

That’s what strategists are warning as Russia’s invasion of Ukraine threatens to derail Europe’s post-pandemic economic recovery and further set back the European Central Bank‘s glacial progress towards policy normalization.

The dollar was one of the world’s worst performing currencies at the start of the war in Ukraine, slipping 3.7% against the dollar over the past month to hit $1.1010 on Friday. Traders sold off the common currency as the slew of sanctions on Russia appear to hurt the economies of European nations most tied to Moscow.

“Currently, the euro is the most liquid short position available to investors,” said Stephen Miller, investment consultant at GSFM, a unit of CI Financial Corp. from Canada to Sydney. “The consequences of this conflict will last for a long, very long time and it is not unimaginable that we will see the euro testing parity with the dollar over a horizon of 12 to 18 months.”

The likelihood of the euro falling below parity with the greenback this year has climbed to 9.6%, according to Bloomberg’s currency forecasting model. That compares to a probability of just 2.4% a month ago, when most observers still viewed the prospect of all-out war in Ukraine as unlikely.

The common currency fell further on Friday after Ukrainian officials said Russian troops bombed Europe’s largest nuclear power plant, located in the east of their country. This caused the currency to drop to the threshold of the $1.10 level it last reached in May 2020.

Adding to the euro’s decline is the difference between the dovish ECB and the hawkish Federal Reserve, which is expected to begin a cycle of interest rate hikes at its March meeting.

“The war in Ukraine and the divergent monetary policy between the EU and the Fed are seriously undermining the euro,” said Qi Gao, currency strategist at Scotiabank in Singapore. “If this war drags on, there is a serious risk that the euro will approach parity against the dollar.”

Traders are currently focusing on $1.10 – to see how long this support level will hold and prevent further declines.

“The longevity of this conflict will be a challenge for wider Europe and euro weakness tends to be a natural play on that,” said George Boubouras, head of research at hedge fund K2 Asset Management in Melbourne. “I continue to see more pressure on the euro from here.”

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