Surging Dollar Raises Possibility of Parity With Euro

The final time the euro and greenback reached parity was late 2002, although Europe’s frequent foreign money has had brushes with the brink within the newer previous. In late 2016, the euro careened towards parity after former President Donald Trump received the U.S. presidential election and as merchants anticipated a collection of interest-rate will increase by the Federal Reserve. These bets, nonetheless, unraveled in 2017 after faster-than-expected growth in Europe. 

Some market watchers say the potential for parity is real looking this time as merchants take care of a hawkish Fed, the ripple results into Europe from Russia’s war in Ukraine and an economic slowdown in China. Many economists and buyers anticipate higher energy prices and provide disruptions stemming from the warfare to depress development in Europe. Any form of weakening demand in China for European items might weigh closely on the area, too. 

In the meantime, the Fed has begun an aggressive marketing campaign to raise rates of interest, offering an extra increase to the greenback, which has emerged as one of many predominant havens for investors this year. Increased rates of interest usually assist the greenback by making U.S. property extra enticing to yield-seeking buyers. The European Central Financial institution, in the meantime, is anticipated to continue to lag behind the Fed in tightening financial coverage.

These elements have despatched the euro and greenback swinging wildly this year—together with Thursday, when the euro rose 1.2% towards the greenback, its greatest soar in additional than two months. The euro reversed a few of these features Friday, when it fell 0.2%. 

Even so, the euro is having its worst begin to a yr since 2015, in response to Dow Jones Market Information. That has pressured some analysts and buyers to revise expectations for parity in latest weeks. 

“For us, the chances of [the euro and dollar] buying and selling at parity have gone from 30% in the beginning of the Ukraine warfare to 75% now,” mentioned

Viraj Patel,

international macro strategist for Vanda Analysis. “There’s little or no that small ECB charge hikes can do to arrest the [euro’s] decline.” 

Thought-about a psychological degree for the foreign money pair, euro-dollar parity additionally has essential implications for native economies and shoppers’ wallets. For People touring overseas this summer season, a weak euro means their {dollars} can go additional. 

For European economies, a weak euro makes imports dearer, which might ripple to create increased native costs. That might put additional stress on economies at a time when European international locations⁠—and others world wide⁠—are already dealing with soaring inflation. 

“Broadly talking, a weaker foreign money has an affect in accelerating inflation,” mentioned

Jane Foley,

head of foreign-exchange technique at Rabobank. However, she famous, “It’s not essentially the degrees [at which the currencies are trading] that make issues tough. It’s the uncertainty and the volatility—the tempo at which we’re shifting—that’s creating difficulties for coverage makers to attempt to gauge issues like inflation.”

A weaker euro may also make euro-denominated property—reminiscent of shares—much less enticing. The benchmark Stoxx Europe 600 index has fallen by 12% this yr, lower than the 18% fall within the S&P 500. However in greenback phrases it’s neck-and-neck with the U.S. index. 

Buyers’ jitters have been obvious elsewhere: Earlier this month, the hole between yields on Italian and German benchmark authorities bonds rose to 2.007 share factors, its highest degree since Might 2020, in response to Tradeweb. On Friday, that unfold rose above 2 share factors once more. A widening hole between Italian and German yields is often seen as a barometer of monetary stress within the area. 

Not all market watchers are satisfied that euro-dollar parity is probably going. The foreign money has but to plunge under what is taken into account a key technical degree for the euro⁠—the $1.034 intraday degree that the euro fell to in early 2017.

“There’s some technical psychology to it,” mentioned Paul Ciana, head of FX technical technique at

Bank of America,

noting that the euro bounced increased after falling to its intraday low of about $1.035 final week. Nonetheless, he famous, “perhaps this time [parity] truly occurs as a result of individuals are much less positioned for it.”

Current information from the Commodity Futures Buying and selling Fee reveals that leveraged funds as of final week held a modest internet quick place towards the euro—however are much less bearish towards the foreign money than they had been at factors final yr. 

“Once I was trying on the euro positions, the very first thing that got here to thoughts was, ‘Oh it’s bought additional to go,’” mentioned Ms. Foley, who has a forecast of $1.03 for the euro within the coming months. 

“I feel if we’re shifting into an atmosphere the place you’ve gotten these dangers constructing for the eurozone—largely as a result of vitality safety but additionally the China slowdown—there may be the chance that die exhausting bulls can be giving up,” she mentioned.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com