Euro Faces Mounting Pressure as Investors Bet on Parity with US Dollar

Investors bet on euro reaching parity with US dollar as eurozone faces economic woes, while US economy remains robust, potentially impacting global trade and markets.

author-image
Bijay Laxmi
Updated On
New Update
Euro Faces Mounting Pressure as Investors Bet on Parity with US Dollar

Euro Faces Mounting Pressure as Investors Bet on Parity with US Dollar

Investors are increasingly betting on the euro reaching parity with the US dollar amid growing economic concerns in the eurozone. Wall Street banks forecast that rising energy prices and flagging growth will drag down the single currency, while the steady decline against the dollar reflects a widening gulf with the more robust US economy.

The euro has fallen to its five-month low this year as the European Central Bank looks set to cut interest rates before the Federal Reserve, fueling market speculation about how much further it could drop. The common currency breached the previous low set in February, reaching a five-month low of $1.0631 on Friday. Banks, including Bank of America Corp, ING Bank NV, and Germany's LBBW, have warned of the risk of the euro reaching parity with the US dollar.

Institutional analysts are revising their forecasts for the euro lower following a recent reappraisal of where interest rates in the US and eurozone are headed in the coming months. The euro is on course to break below $1.05, according to a new analysis, with last week's heavy losses opening the door to further declines. The trend for EUR/USD is becoming more bearish, and the ECB has created enough uncertainty regarding the interest rate path beyond June to support the weakening of the euro.

Why this matters: The potential for the euro to reach parity with the US dollar has significant implications for the global economy. It reflects the diverging economic trajectories of the eurozone and the United States, with the latter showing more resilience and the former facing mounting challenges. The exchange rate shift could impact trade, investments, and financial markets worldwide.

Rising US inflation means the ECB will likely cut interest rates ahead of the US Federal Reserve, creating a policy divergence that will potentially weigh on the EUR/USD exchange rate. Experts believe the euro could end the year on a high, with the consensus forecast for the single currency to trade at around $1.18 in a year's time, the highest projection in a year. However, bearish sentiment persists as rising recession fears and a broad shift into haven assets have boosted the US dollar.

Key Takeaways

  • Investors bet on euro reaching parity with US dollar amid economic concerns in eurozone.
  • Euro has fallen to 5-month low as ECB looks to cut rates before Fed, risking further drop.
  • Analysts revise euro forecasts lower, with potential to break below $1.05 amid bearish trend.
  • Diverging economic trajectories of eurozone and US could impact trade, investments, and markets.
  • Consensus forecast euro to trade at $1.18 in a year, but bearish sentiment persists.