Euro just off two-decade low, volatility at highest since March 2020

July 7 (Reuters) – A slight pullback in the dollar offered the euro some respite, allowing it to edge away from two-decade lows reached this week after surging energy prices fanned recession fears.

Risky assets, including the euro, managed gradual gains on Thursday as investors grappled with the risks of a recession and a potential pause in interest rate hikes.

Meanwhile, implied volatility in the forex market was still at its highest levels since late March 2020 at 11.2%, reflecting a nervous market while investors look at the parity between the single currency and the dollar.

“Parity is within reach, and one can expect the market to want to see it now,” said Moritz Paysen forex and rates advisor at Berenberg.

The euro rose 0.2% to 1.02 after hitting a two-decade low at 1.01615 on Wednesday.

According to George Saravelos, global head of forex research at Deutsche Bank, “if Europe and the U.S. slip-slide into a recession in Q3 while the Fed is still hiking rates, these levels (0.95-0.97 in EUR/USD) could well be reached.”

“The two key catalysts to mark a turn in the USD embedded in our forecasts are a signal that the Fed is entering a protracted pause in its tightening cycle and/or a clear peak in European energy tensions via an end to Ukraine hostilities,” he said.

The dollar index — which measures the currency against six counterparts — slipped 0.2% to 106.88, pulling away from Wednesday’s peak of 107.27, a level not seen since late 2002.

Commodity-linked currencies strengthened as copper prices climbed. Some investors returned to the market on Thursday after heightened recession fears sent the red metal to its lowest level in nearly 20 months.

The Australian dollar rose 0.7% to 0.6822 against the U.S. dollar after recently hitting its lowest since May 2020 at 0.6762.

The Swiss Franc was still hovering right above its highest since 2015 against the euro at 0.9872.

Earlier this week, inflation rising above the Swiss National Bank’s (SNB) 0-2% target range for the fifth month fuelled talks that the central bank could soon tighten its policy. Last month it hiked its policy rate for the first time in 15 years.

The SNB has signaled it is prepared to see the Swiss franc strengthen to choke off imported inflation.

Britain’s pound rose versus a weakening dollar on Thursday after hitting a more than two-year the day before as Prime Minister Boris Johnson clung to power despite the resignation of key cabinet members.

Sterling was up 0.5% to %1.1977, while rising 0.2% versus the euro at 85.21 pence.

Analysts said that the pound was mostly moving on broader economic concerns about a global recession, rather than Britain’s political turmoil.

Bitcoin fell 0.7% and was last trading at $20,402. Ether fell 0.8% to 1,176.

(Reporting by Stefano Rebaudo; Editing by Kim Coghill and Angus MacSwan)