The Euro Takes a Beating

Summary of the publication

• The euro recently fell to parity with the US dollar for the first time since late 2002. It’s underperforming for a number of reasons. First, the greenback remains strong against most currencies because it’s a safe haven in uncertain times. Second, the European Central Bank (ECB) is lagging behind with its monetary tightening. Third, recession seems more likely in Europe due to increasing natural gas supply issues and other effects of the war in Ukraine. Finally, there’s concern about the ECB’s upcoming rate hikes and how they could affect some eurozone countries. Analysts are keeping an especially close eye on Italy, where Prime Minister Mario Draghi recently lost the support of the Five-Star Movement, ratcheting up the political uncertainty.
• The Japanese yen is also at levels not seen in years. It hasn’t traded around ¥140/US$ since 1998. Like today, there was a stark difference between US and Japanese monetary policy back then. There was also economic uncertainty surrounding the financial crisis in some emerging Asian markets. The Bank of Japan is currently in no rush to raise interest rates as it faces significantly lower inflation. Inflation there recently crept above the 2% target, however. 
• The Canadian dollar has stabilized around US$0.77 in the past few weeks. The latest commodity price movements have had less of an impact on the currency pair. Canada’s real estate market is slowing sharply, but doesn’t seem to be affecting the loonie too much for now. There’s also been some positive data on the Canadian economy of late, including May’s big trade surplus. Investors continue to expect more interest rate hikes in Canada, and many Canadian bond yields are still higher than their American counterparts. 
• Meanwhile economic uncertainty and rising interest rates in the US have prompted a little more movement in emerging market currencies. The Mexican peso is back up around 20.50 peso/US$, while the Chinese yuan is trading at about 6.75 yuan/US$. Commodity-sensitive emerging markets are at a greater risk of currency depreciation, however. The Brazilian real depreciated from around 4.80 real/US$ at the beginning of June to about 5.40 real/US$ recently.