Euro strikes fresh 20-year low as eurozone economy shrinks again

The single currency tumbled to $0.9901 but later clawed back losses to return close to parity with the dollar in afternoon trading.

The dollar has strengthened against other currencies ahead of a speech later this week by US Federal Reserve chief Jerome Powell, as markets speculate that the central bank will further tighten its monetary policy.

Higher interest rates boost the greenback as they make dollar-denominated debt more attractive to investors.

But the euro is also weighed down by a gloomy outlook for the eurozone economy as Russia’s war in Ukraine has sent energy prices soaring.

The shared unit had already plunged below parity Monday on recession fears to plumb the lowest levels since 2002, when it came into physical circulation.

In the latest blow, S&P Global’s closely watched monthly composite purchasing managers’ index (PMI) showed that eurozone economic activity fell for the second month in a row in August.

– ‘Overarching threat’ – “Eurozone PMIs … confirm concerns of an impending recession in Europe on the back of high inflation and energy crunch, as they signal declining activity for two months in a row,” warned Citi analyst Luis Costa.

“The energy crunch remains an overarching threat to economic stability in Europe,” he added.

Equities in the region wavered amid stubborn worries that the US Federal Reserve will carry on ramping up interest rates to fight inflation.

Rising US interest rates also push the dollar higher against other currencies.

On Tuesday, natural gas prices fell, although they remain elevated on fears of a halt to Russia’s gas deliveries to Europe.

The Dutch TTF Gas Futures contract stood at 263.71 euros per megawatt hour, down from Monday.

Gas had spiked to record peaks in March after key producer Russia launched its invasion of neighbouring Ukraine.

That has sparked surging domestic energy bills, fuelling decades-high inflation that has prompted tighter monetary policy around the world.

– ‘More effective than Kalashnikovs’ – “As it has become painfully obvious, natural gas is a much more effective weapon in the hands of Russian politicians than the Kalashnikov in the hands of their soldiers,” noted PVM analyst Tamas Varga.

This has hit the single currency hard because the bloc relies heavily on imported Russian gas, said Societe Generale analyst Kit Juckes.

Fears increased after Russia’s Gazprom said Friday the Nord Stream pipeline would be closed for maintenance at the end of the month, cutting Europe’s crucial gas deliveries.

“The euro’s problem is … the threat from continued squeezing of gas supplies and the cost of replacing Russian gas,” Juckes said.

Asian markets fell again Tuesday as traders grew increasingly jittery over rising US rates.

A day after closing in the red, Wall Street indices were mixed at the open on Tuesday, with the Dow Jones Industrial Average flat while the S&P 500 and tech-rich Nasdaq were up.

With the Jackson Hole symposium of central bankers and finance chiefs taking place this week, the focus is on what Fed chief Jerome Powell says about its plans to tackle prices, with many fearing officials could send the economy into recession.

Oil prices — which have fallen for weeks as recession worries hit demand expectations — rebounded after Saudi Arabia suggested OPEC and other major producers could cut output citing “volatility” in crude markets.