Informist, Tuesday, Jul 12, 2022
NEW DELHI – The euro was on a par with the US dollar for the first time in nearly two decades, an outcome of the divergent monetary policy actions on opposite sides of the Atlantic and recession concerns driven by a looming energy crisis in Europe weighing on the common-bloc currency.
Investors averse to risks have flocked to haven currencies, particularly the US dollar, while the European unit has fallen 11.8% against the dollar since the beginning of the year.
The European Central Bank announced last month that it would hike interest rates this month for the first time since 2011, but it remains a laggard compared to other developed economies. The US Federal Reserve has hiked interest rates by 150 basis points so far this year, and indicated another 175 bps of rate increases in 2022.
The euro has been under pressure as the European Central Bank continues to deal with varying economies within the bloc. The central bank’s monetary policy execution is hindered by a divergence in borrowing costs for different member nations. This has cast doubt over whether the ECB can adequately tighten policy to bring down soaring inflation.
Inflation in the eurozone was at a record high of 8.6% in June, according to a preliminary reading, far above the central bank’s 2% target.
As price pressures climb, fear of recession looms large in the eurozone. This comes amid the uncertainty of energy supply due to Russia’s ongoing war with Ukraine. The European Union, which received roughly 40% of its gas through Russian pipelines before the war, is trying to reduce its dependence on Russian oil and gas.
Russia has already clamped down on gas supply to some EU countries.
Nord Stream I, the biggest single pipeline carrying gas from FRussia to Germany, began annual maintenance on Monday, with flows expected to stop for 10 days. Governments, markets and companies are worried that the shutdown might be extended because of the war in Ukraine, adding to concerns about an energy crisis in the eurozone, according to reports.
As bets stack up against the common-bloc currency, the ECB’s monetary policy actions will be closely watched by market participants in hope of some respite. End
US$1 = 79.60 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Reported by Pratiksha
Edited by Avishek Dutta
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