Philippine central bank hastens interest rate rise, ready for more action

MANILA, July 14 (Reuters) – The Philippine central bank raised its key interest rates by 75 basis points in a surprise move on Thursday and kept the door open for further tightening as it rushed to contain broadening inflationary pressure and rescue a faltering peso.

Implemented outside the regular policy-meeting cycle, the tightening move was the most aggressive by the Bangko Sentral ng Pilipinas (BSP) since the central bank shifted to an inflation-targetting approach in 2002.

The rise in interest rates accompanied policy shifts effected by other central banks in Asia and elsewhere on Wednesday and Thursday. They included one in Singapore that was also an off-cycle move.

In the Philippines, the rate on the key overnight reverse repurchase facility rose to 3.25%, BSP Governor Felipe Medalla said in a statement.

“In raising the policy interest rate anew, the Monetary Board recognized that a significant further tightening of monetary policy was warranted by signs of sustained and broadening price pressures amid the ongoing normalization of monetary policy settings,” Medalla said.

The rates on the BSP’s overnight deposit and lending facilities were also raised by 75 basis points, to 2.75% and 3.75%, respectively.

No such move was expected on Thursday because the BSP did not have a regular policy meeting scheduled until Aug. 18. The central bank previously raised interest rates by 25 basis points in May and again in June.

Medalla said the BSP would still hold the Aug. 18 meeting, and policy moves remained data-dependent.

Inflation surged to the highest level in nearly four years in June, and is widely expected to remain elevated, pushing the full-year average beyond the target band of 2% to 4%.

Finance Secretary Benjamin Diokno said the economy remained robust and could thus absorb Thursday’s interest rate rise. It would remain supported by the easing of COVID-19 restrictions and structural reforms, he added.

The 6.5%-7.5% growth target for gross domestic product set for this year by the newly installed Marcos administration remains within reach, BSP Deputy Governor Francisco Dakila said in a media briefing.

The second-quarter GDP growth, which will be announced on Aug. 9, “is very likely (to be) strong or even stronger than first quarter numbers”, he said.

PESO RECOVERS

The Philippine peso, which had hit a record low early this week versus the U.S. dollar, recovered some lost ground and was last up 0.3%.

The peso is the worst-performing currency in Southeast Asia this year as the greenback continues to strengthen on expectations for faster Federal Reserve policy tightening.

The Fed is seen stepping up its tightening campaign with a supersized 100 basis point rate hike this month after a report showed inflation racing at four-decade highs.

The BSP’s move was meant to support or at least stabilize the peso exchange rate, said Michael Ricafort, economist at Rizal Commercial Banking Corp. in Manila.

A weak peso adds further pressure on inflation, threatening to derail recovery of the consumption-driven domestic economy.

“More rate hikes are still possible, if needed, as a function of any further Fed rate hikes to bring down elevated inflation,” Ricafort said.

FURTHER TIGHTENING POSSIBLE

Medalla said the BSP was ready “to take further necessary actions to steer inflation towards a target-consistent path over the medium term”.

The central banks of New Zealand and South Korea increased interest rates by 50 basis points on Wednesday, when Canada’s shocked markets by going for 100 basis points.

Singapore’s Thursday move was re-centring the mid-point of an exchange-rate policy band.

Malaysia’s central bank raised its benchmark interest rate for the second straight meeting last week.
Indonesia’s central bank may raise interest rates in the current quarter to contain future pressure on core inflation, but any rise will not be aggressive, its governor said on Friday.

(Reporting by Enrico Dela Cruz, Karen Lema and Neil Jerome Morales; Editing by Ed Davies and Bradley Perrett)

Philippine central bank makes surprise 75 bps hike in interest rates

MANILA, July 14 (Reuters) – The Philippine central bank on Thursday raised its benchmark interest rates by 75 basis points in a surprise off-cycle move, and signalled its readiness to take further policy action to contain broadening inflationary pressures, its governor said.

That brings the key overnight borrowing rate to 3.25% effective Thursday, Bangko Sentral ng Pilipinas Governor Felipe Medalla said in its announcement via Facebook.

(Reporting by Enrico Dela Cruz, Karen Lema and Neil Jerome Morales; Editing by Ed Davies)

Asian shares bruised as US inflation data boosts recession fear

HONG KONG, July 14 (Reuters) – Asian shares struggled on Thursday and the safe haven dollar was strong as white-hot US inflation data drove fear the Federal Reserve will raise interest rates even more aggressively to slow price increases, potentially sending the economy into recession.

MSCI’s broadest index of Asia-Pacific shares outside Japan lost 0.1%, hovering just above the two-year low hit on Tuesday, while US Nasdaq futures shed 0.3%.

Japan’s Nikkei .N225 bucked the trend by rising 0.6%, helped by the yen’s weakness against the dollar boosting exporters.

Overnight US data showed rising costs of fuel, food and rent drove the consumer price index (CPI) up 9.1% last month, leading to worries that the Fed could raise rates by an enormous 100 basis points at its meeting next month rather than the 75 that had been expected.

“The concerning aspect in the CPI numbers was the breadth of increases,” said Shane Oliver, chief economist at AMP, who said nearly 90% of the US CPI components saw increases of more than 3%.

Market pricing on the CME’s Fedwatch tool currently indicates a 78% chance of a 100 basis increase, though Oliver said this could be a knee jerk reaction to the high CPI reading.

“I personally think the Fed will stick to 75 – which is still a high number – if they go to 100 it will look like they are panicking.”

“Only time will tell though, the Fed does have an unconditional commitment to get inflation back down.”

US two-year yields, which reflect interest rate expectations, were last at 3.121%, just off an overnight four-week high, increasing their lead on US benchmark 10 year yields which were at 2.9558%.

So-called yield curve inversion, when short-dated interest rates are higher than longer ones, is commonly seen as an indicator of a recession, and the gap between the two touched 25 basis points in early Asia.

This also is bad news for Asian economies and stocks.

Carlos Casanova, senior economist at UBP, said a recession in the US would mean less demand for Asian exports, with investors turning more “risk off” and moving money out of emerging markets, and forcing Asian central banks to raise rates themselves to avoid too currency depreciation.

“So far Bank of Korea and the Reserve Bank of New Zealand seem to be competing with each other to see who can be the most hawkish, but all the other central banks are lagging. We will see more rate hikes in Asia, which will lead to a deceleration in aggregate demand, credit growth, consumption and the like.”

Singapore’s central bank also tightened its monetary policy on Thursday, in an off-cycle move hoping to slow inflation, sending the local currency up 0.7%.

Elsewhere in currency markets, the euro was hovering back just above parity with the dollar at USD 1.00155. It briefly dipped to USD 0.9998 overnight, breaking below USD 1 for the first time since December 2002.

The European central bank faces a dilemma of whether to let the currency fall further, pushing up already record high inflation, or fighting back with more rapid interest rate hikes increasing the damage to an economy already hit hard by high energy costs.

The dollar was also firm against other majors, rising over 138 yen for the fist time since September 1998. The dollar index, which tracks the currency against six majors, was holding firm at 108.45.

Oil prices slightly extended their recent losses due to inflation concerns.

Brent crude futures for September fell 0.1%, to USD 99.49, and US West Texas Intermediate crude lost 0.15% to USD 96.17.

Gold faced heavy selling pressure as higher rates hurt the non-interest-bearing asset. The spot price was down 0.5% at USD 1,725 an ounce.

(Reporting by Alun John; Editing by Christopher Cushing)

Gold dips after US inflation data sparks jumbo rate hike concerns

July 14 (Reuters) – Gold prices slipped on Thursday, as Treasury yields and the dollar rose, with bullion’s outlook hurt by fears the Federal Reserve could go for a more aggressive interest rate hike this month, after data showed US inflation sky-rocketed in June.

FUNDAMENTALS

* Spot gold fell 0.4% to USD 1,728.39 per ounce by 0100 GMT. US gold futures dropped 0.5% to USD 1,726.60.

* The dollar edged up towards 20-year highs, hurting demand for greenback-priced gold among buyers holding other currencies.

* Benchmark US 10-year Treasury yields rose, weighing on appetite for zero-yield gold.

* US annual consumer prices jumped 9.1% in June, the sharpest spike in more than four decades, leaving Americans to dig deeper to pay for gasoline, food, healthcare and rents.

* Markets swung wildly on Wednesday, as the euro touched parity versus the dollar for the first time in 20 years, while investors also feared larger Fed rate hikes could be on the way.

* The Fed is seen ramping up its battle with sky-high inflation with a supersized 100 basis points rate hike at its upcoming policy meeting on July 26-27.

* Although gold is seen as an inflation hedge, higher rates hurt the appeal of bullion, which bears no interest.

* A rallying dollar sent gold prices to a near one-year low on Wednesday following the inflation report, but a retreat in the greenback helped bullion make a sharp recovery and end the session higher.

* SPDR Gold Trust GLD, the world’s largest gold-backed exchange-traded fund, said its holdings fell 0.17% to 1,019.79 tonnes on Wednesday from 1,021.53 tonnes on Tuesday.

* Spot silver fell 0.4% to USD 19.11 per ounce, platinum slipped 0.8% to USD 847.75, and palladium eased 0.5% to USD 1,964.74.

(Reporting by Bharat Govind Gautam in Bengaluru; Editing by Rashmi Aich)

Oil prices tick down as inflation woes take center stage

SINGAPORE, July 14 (Reuters) – Oil prices ticked down on Thursday as investors doubled down on the possibility of a rate hike by the US Federal Reserve that would stem inflation and curb oil demand.

Brent crude futures for September fell 20 cents, or 0.2%, to USD 99.37 a barrel by 00:10 GMT after gaining 8 cents on Wednesday.

US West Texas Intermediate crude for August delivery was at USD 95.93 a barrel, down 37 cents, or 0.4%, after rising 46 cents in the previous session.

The Federal Reserve is seen ramping up its battle with 40-year high inflation with a supersized 100 basis points rate hike this month after a grim inflation report showed price pressures accelerating.

The Bank of Canada on Wednesday raised its main interest rate by 100 basis points in a bid to crush inflation, surprising markets and becoming the first G7 country to make such an aggressive hike in this economic cycle.

The European Commission predicted record levels of inflation and slashed its GDP forecast for 2022 and 2023 as a result of war in Ukraine, crimped demand due to surging prices and the danger of winter energy shortages, Bloomberg News reported on Wednesday citing a draft of the projections.

Investors also flocked to the dollar, often seen as a safe haven asset. The dollar index hit a 20-year high on Wednesday, which makes oil purchases more expensive for non-US buyers.

Worries of COVID-19 curbs in multiple Chinese cities to rein in new cases of a highly infectious subvariant has also kept a lid on prices.

China’s daily crude oil imports in June sank to their lowest since July 2018, as refiners anticipated COVID-19 lockdown measures to curb demand, data showed on Wednesday.

Meanwhile, US President Joe Biden will on Friday fly to Saudi Arabia, where he will attend a summit of Gulf allies and call for those allies to pump more oil.

However, spare capacity at the Organization of the Petroleum Exporting Countries is running low with most of the producers pumping at maximum capacity and doubt exists as to how much extra Saudi Arabia can bring into the market quickly.

Data from the US Energy Information Administration also point to slackening demand with product supplied slumping to 18.7 million bpd, its lowest since June 2021. Crude inventories rose, bolstered by another big release from strategic reserves.

(Reporting by Arathy Somasekhar in Houston)

Inflation report sets grim markets tone as investors ponder 100-basis-point hike

NEW YORK, July 13 (Reuters) – A surprisingly hot inflation report for June is complicating the outlook for markets, as investors brace for more hawkishness from the Federal Reserve and continued volatility in stocks and bonds.

Wall Street met the number, which showed consumer prices rising by a greater-than-expected 9.1% in June, with a collective groan. Analysts at Wells Fargo called the report “rotten to the core” while BofA Global Research strategists said it confirmed their recent call for a mild US recession.

Federal funds futures, which reflect traders’ bets on monetary policy, recently showed a 70% chance of a supersized 100 basis points rise at the coming meeting, compared with a roughly one-in-nine chance before the report, according to data from the CME Group.

“It’s most likely we’re going to have a recession because the Fed is going to have to act aggressively,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

“Unfortunately we were looking for good news and this is not good news,” he said.

The report fueled sharp swings in stocks, with the benchmark S&P 500 index falling as much as 1.6% before climbing into positive territory. It ended down 0.45% for the day and is off more than 20% this year.

Recession worries have grown over the last few weeks, with several Wall Street banks calling for an increased chance of an economic downturn brought on by a hawkish, inflation-fighting Fed. The International Monetary Fund on Tuesday warned that avoiding recession in the United States will be “increasingly challenging” as it again cut its 2022 US growth forecast.

The inversion on the US two-year/10-year yield curve US2US10=TWEB accelerated on Wednesday to as much as 24.20 basis points, the most inverted in nearly 22 years, Refinitiv data showed, once again flashing a signal that has preceded past recessions.

Following the inflation data, traders of futures tied to the Fed’s policy rate swiftly priced in a higher probability of a 100-basis-point rise at the July 26-27 meeting. Central bankers over the past couple of weeks have already signaled support for a 75 basis point rate increase.

Wells Fargo’s analysts noted that the upside surprise can be tied mostly to greater strength in core inflation, which strips away volatile food and energy prices. That could help set the stage for the Fed to hike even more than 75 basis points in July, they wrote on Wednesday.

“To be clear, a 100 bps rate hike is not our base case at present, but yet another surprisingly strong CPI report cracks the door to such a move should the FOMC decide to bang that door wide open,” the Wells analysts said in a note.

The hawkish outlook for the Fed compared to many other global central banks also rippled through currency markets, with the dollar surging to a 20-year high against a basket of currencies while the euro broke below parity against the greenback.

Some analysts said inflation could start to cool in the coming months, noting a recent drop in commodity prices.

Peter Cardillo, chief market economist at Spartan Capital Securities, said “the numbers are ugly” but added that “the hints that inflation might be beginning to decelerate are there.”

Investors are now turning to second-quarter earnings season, which is just starting, to reinvigorate the market.

S&P 500 earnings are expected to have climbed 5.7% from the year-ago period, but investors are skeptical companies will be able to achieve those estimates given the uncertain economic outlook, including high inflation that is raising costs for both consumers and businesses.

“We look for further market volatility as investors digest the combination of slowing growth, persistent inflation, and the likelihood that second quarter earnings season results in downward revisions for margins and profits,” John Lynch, chief investment officer at Comerica Wealth Management, said in emailed comments.

(Reporting by Lewis Krauskopf, Sinéad Carew, Herbert Lash, and Stephen Culp; Editing by Ira Iosebashvili, Chizu Nomiyama and Jonathan Oatis)

Euro is at parity; its fate is now with energy markets

LONDON, July 13 (Reuters) – The euro’s tumble below USD 1 for the first time in two decades puts it on course for one of the worst years in its history, especially if the energy price shock triggered by the Ukraine conflict tips the bloc into a prolonged economic crisis.

The single currency has teetered on the brink of parity versus the greenback for days, finally breaching that level on Wednesday. Its 11.8% year-to-date fall is almost on par with losses seen in 2015, the year the European Central Bank unleashed massive stimulus.

Wednesday’s move may open the doors for a move towards USD 0.96, analysts predict, with some expecting a fall to USD 0.90 if gas supplies are disrupted much further.

The moves put the ECB in a bind. It is expected to raise interest rates next week for the first time since 2011 to combat inflation running at a record high 8.6%.

Currency weakness exacerbates that inflation problem. Yet the ECB cannot risk aggressive policy tightening for fear of sending economic growth into reverse.

“We see room for a move all the way to USD 0.97 and possibly even USD 0.95,” Olivier Konzeoue, director in the currency team at asset manager UBP, said, noting the implication of the energy crisis for Europe’s economy.

“Basically, we know it’s all about Russia,” he added.

The euro’s latest leg lower came after gas flows through Russia’s Nordstream 1 pipeline shut for 10 days for maintenance. But if Moscow extends the shutdown, Germany — already in stage two of a three-tier emergency gas plan — may be forced to ration fuel.

“If the gas pipeline that’s closed for 10 days doesn’t reopen and we get more gas rationing, in that situation we may not have seen the weakest levels of the euro,” said Christian Keller, head of economics research at Barclays.

Spiralling energy costs are already exerting a toll. Germany has just reported its first trade deficit since 1991 and investor sentiment has plunged below levels seen when the coronavirus pandemic erupted in 2020.

SHORT-TERM OPTIONS

In the near-term, it may be all about technical factors and options markets, where traders place directional bets or hedge currency exposure. Options to the tune of USD 1 billion to USD 1.5 billion expire next week, and traders said a conclusive — and sustained — breach of parity will trigger orders to sell euros, potentially sending it to USD 0.95.

Even before the latest euro dive, speculators were positioned for weakness, with bearish bets at the highest levels so far this year, according to U.S. CFTC data.

But further out, gas prices are key.

Analysis by BNP Paribas of how currencies have historically performed when energy prices soar, shows the euro suffers more than other developed currencies from gas price shocks, falling an average of 4.5% during such times.

JPMorgan noted the euro area is already facing “parabolic” gas price spikes, with supplies down 53% in June. Industrial powerhouse Germany has witnessed a 60% supply decline.

It cut its euro-dollar target to USD 0.95, “a reflection the market will become increasingly willing to price in greater probability for an escalation”.

The worst case could bring a test of USD 0.90, JPMorgan said, citing the Bundesbank’s forecast of a 6% hit to German GDP in the first year if supplies stop completely.

Nomura’s Jordan Rochester reckons the euro may fall to USD 0.95 by end-August but in a scenario where gas storage tanks fail to replenish by winter, it could slip to USD 0.90.

Similarly, Citi analysts predict a Russian supply halt will send gas prices surging well above current levels of around 170 euros per megawatt hour.

All else being equal, the euro will fall to USD 0.98 if gas hits 200 euros, while at 250 euros, it would trade below USD 0.95, they told clients.

In theory, the ECB could intervene by selling dollars to prop up the currency as it did back in 2000, when the euro fell to around USD 0.83.

But the bank has signalled it may not step in this time, possibly because the euro’s “real” exchange rate — against trade partners’ currencies and adjusted for inflation — is well above where it was in 2002, the last time euro-dollar parity was hit.

(Reporting by Dhara Ranasinghe, Sujata Rao, Saikat Chatterjee, Tommy Wilkes and Elizabeth Howcroft in London and Saqib Ahmed in New York; editing by Sujata Rao and Jonathan Oatis)

Hot inflation fuels bets on supersized Fed rate hike

July 13 (Reuters) – The U.S. Federal Reserve is seen ramping up its battle with 40-year high inflation with a supersized 100 basis points rate hike this month after a grim inflation report showed price pressures accelerating.

“Everything is in play,” Atlanta Fed President Raphael Bostic told reporters in Florida, when asked about the possibility.

While he said he still needed to study the “nuts and bolts” of the report, “today’s numbers suggest the trajectory is not moving in a positive way. … How much I need to adapt is really the next question.”

Bostic has been among the bevy of central bankers in recent weeks signaling support for a second straight 75 basis points rate increase at their upcoming policy meeting on July 26-27.

But after Wednesday data from the Labor Department showed rising costs of gas, food and rent drove the consumer price index (CPI) up 9.1% last month from a year earlier, views may be evolving.

Traders of futures tied to the Fed’s policy rate are betting they already have: They are now pricing in a nearly 80% probability of a full percentage-point rise at the coming meeting, according to an analysis of the contracts by CME Group.

That was up from about a one-in-nine chance seen before the report, which also showed core inflation, excluding more volatile food and energy prices, accelerated on a monthly basis.

The expectation that the Fed will get more aggressive to stop inflation is also raising alarm that policymakers will go too far and crater economic growth as well.

Yields on longer-term Treasuries fell, making the so-called yield-curve inversion the most pronounced it has been in more than 20 years.

An inversion is seen as a harbinger of a downturn because it suggests investors are banking on a growth slowdown. Rate futures trading suggests investors anticipate the Fed may need to start cutting interest rates again by the middle of next year.

“The June CPI report was a straight up disaster for the Fed,” wrote SGH Macro Advisors’ Tim Duy. “The deepening yield curve inversion is screaming recession, and the Fed has made clear it prioritizes restoring price stability over all else.”

Other central banks are also feeling the heat with the Bank of Canada on Wednesday raising its benchmark interest rate by 100 basis points in a bid to tame soaring inflation, a surprise move and its biggest in nearly 24 years.

‘RECESSION THREAT IS RISING’

Fed Chair Jerome Powell and other policymakers have become increasingly worried that business and consumer expectations of a torrid rate of future price increases could become entrenched. They have shown they will react swiftly when data worsens.

Ahead of its prior meeting in June, the Fed telegraphed a 50 basis points move before pivoting at the last minute to a three quarter point hike on the back of a worse-than-expected inflation report for May, as well as a downbeat consumer inflation expectations survey the same day.

The persistence of such high inflation and the strength of the central bank’s moves needed to quash it are also once again sharpening fears a recession is on the horizon.

A Fed survey of firms across the country published later on Wednesday showed increased pessimism on the outlook for the economy, with almost half of the central bank’s districts reporting firms seeing an increased risk of a recession, while substantial price increases were reported across all districts with “most contacts expect(ing) pricing pressures to persist at least through the end of the year.”

Fed research published this week based on modeling of bond-market yields puts the chance of a recession next year at about 35% if the Fed sticks to its expected baseline rate-hike path, but at 60% if the Fed removes accommodation faster.

“With supply conditions showing little sign of improvement, the onus is on the Fed to hit the brakes via higher rates to allow demand to better match supply conditions. The recession threat is rising,” said James Knightley, chief international economist at ING.

The Fed began tightening policy only in March, and has already raised its benchmark overnight lending rate by 1.5 percentage points. Financial markets now predict that rate will reach the 3.5% to 3.75% range by year end, higher than Fed policymakers themselves predicted just three weeks ago.

A very tight labor market has so far withstood those swift rate hikes, with unemployment remaining at 3.6%, near a historic low. However, that is seen as a double-edged sword as it also raises concerns that such competition for labor will eventually have to cool to ease inflation.

The U.S. Senate on Wednesday confirmed Michael Barr, a former Treasury official, as the Fed’s vice chair of supervision, filling the last vacant seat on the Fed’s seven-member board.

(Reporting by Lindsay Dunsmuir and Ann Saphir; Additional reporting by Howard Schneider, David Morgan and Sinead Carew; Editing by Chizu Nomiyama and Jonathan Oatis)

((Lindsay.Dunsmuir@thomsonreuters.com; +1 646 384 8221;))

Gold rebounds sharply from 1-year low as dollar slips

July 13 (Reuters) – Gold rebounded from a near one-year low on Wednesday as the dollar retreated following an initial rally, helping bullion stave off pressure from prospects of steep rate hikes after US consumer prices surged.

Spot gold rose 0.8% to USD 1,739.49 per ounce by 1:59 p.m. ET (1759 GMT), clambering from its lowest since August 2021 at USD 1,707.09 after the US data powered the dollar to a fresh multi-decade peak.

US gold futures settled up 0.6% at USD 1,735.5.

US consumer prices accelerated in June, cementing the case for the Federal Reserve to hike rates by 75 basis points later this month.

The dollar subsequently gave up gains, boosting appetite for gold among overseas buyers. US Treasury yields also slipped.

The CPI print drove the idea that the Fed is more likely than not to hike rates aggressively and probably keep them there for longer, driving gold’s initial retreat, said Bart Melek, head of commodity strategies at TD Securities.

The retreat in yields and the dollar that followed could be helping gold, with investors who took short positions as gold moved to the low USD 1,700s now covering those, Melek added.

Although gold is considered an inflation hedge, rising rates draw investors away from bullion by raising the opportunity cost of holding the zero-yield asset.

Steep rate hike prospects were still likely to keep a tight leash on gold, analysts said, even as economic concerns persisted.

But Fawad Razaqzada, market analyst at City Index, said in a note that “the post-CPI reaction clearly suggests that investors are thinking that the big inflation readings will hurt the economy so badly that not only will the Fed stop hiking rates soon, but will go in reverse as early as Q1.”

Spot silver rose 1.8% to USD 19.23 per ounce, platinum XPT= was up 1.1% at USD 855.31, while palladium XPD= fell 2.2% to USD 1,982.84.

(Reporting by Ashitha Shivaprasad in Bengaluru; Editing by Vinay Dwivedi and Shailesh Kuber)

Why the euro’s fall below parity versus dollar matters

LONDON, July 13 (Reuters) – Europe’s single currency has dropped below parity against the dollar for the first time in almost 20 years, battered by growing recession fears in the euro area.

On Wednesday, it slumped to as low as USD 0.9998 and is down almost 12% so far this year.

It started the year on a strong note before the war in Ukraine fuelled inflation and hurt the bloc’s growth outlook.

Here’s an outline of the significance of the move.

WHAT’S THE BIG DEAL?

For starters, a drop below the USD 1 level is rare.

Since its birth in 1999, the single currency has spent very little time below parity. In fact, the previous time it did so was between 1999 and 2002, when it sank to a record low of USD 0.82 in October 2000. Euro banknotes and coins were only introduced on Jan. 1, 2002, with the currency only existing before that day as a unit of account for settling cross-border transactions.

Within its relatively short two-decade history, the euro is the second-most sought-after currency in global currency reserves and daily turnover in the euro/dollar is the highest among currencies in the global USD 6.6 trillion market per day.

BUT EVERYTHING’S WEAK VERSUS THE DOLLAR

True. The likes of sterling and the yen have also slid this year, partly because of more aggressive US rate hikes have boosted the dollar’s appeal and also as global recession fears have sent investors flocking to the safe-haven dollar.

The European Central Bank is expected to start hiking rates at its July 21 meeting. The Federal Reserve hiked rates by 75 bps in June.

Growing fears that soaring European gas prices makes the euro area more susceptible to recession risks also explain why the euro is being hit hard now.

Some global banks are forecasting a recession for the euro area as soon as the third quarter.

WILL THE EURO FALL MORE?

Some economists think so. Nomura has a short-term target of USD 0.95.

Analysts say that until the economic outlook improves the euro will remain in the doldrums. Even if the ECB hikes rates, the Fed is hiking by more, luring cash into the United States. The euro could also be hurt by fragmentation risks, where weaker states’ borrowing costs rise by more than wealthier peers.

One favourable factor for the euro is that shorting the currency is already a popular trade in currency markets right now and bearish positioning is approaching historical levels. That might prevent the euro from falling sharply.

WHAT DOES THIS MEAN FOR THE ECB?

A big headache. Letting the currency fall would push up already record high inflation, raising the risk of price growth becoming entrenched at a rate well above the ECB’s target of 2%.

But fighting back against 20-year lows for the euro would require more rapid rate hikes, which could add to the misery for an economy already facing a possible recession.

Studies frequently cited by the ECB suggest that a 1% depreciation of the exchange rate raises inflation by 0.1% over one year and by up to 0.25% over three years.

IS INTERVENTION COMING?

The ECB has so far played down euro weakness, arguing that it has no exchange rate target, even if the currency does matter as part of the wider inflation calculations

The euro has slumped almost 12% against the dollar so far this year. But on a trade-weighted basis — against its trade partners’ currencies — the euro is down only 3.6%.

To prop up the euro, the ECB could signal more aggressive tightening, including a 50-basis-point rate hike in September, and further moves in October and December.

Analysts reckon a more hawkish stance is unlikely given the deteriorating growth outlook.

(Reporting by Dhara Ranasinghe and Saikat Chatterjee in London and Balazs Koranyi and Francesco Canepa in Frankfurt; Editing by Toby Chopra)

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