Surging Dollar Raises Possibility of Parity With Euro

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

Some market watchers say the potential of parity is lifelike this time as merchants cope with a hawkish Fed, the ripple results into Europe from Russia’s war in Ukraine and an economic slowdown in China. Many economists and traders count on higher energy prices and provide disruptions stemming from the conflict to depress progress in Europe. Any sort 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 carry rates of interest, offering an additional enhance to the greenback, which has emerged as one of many predominant havens for investors this year. Increased rates of interest sometimes assist the greenback by making U.S. belongings extra enticing to yield-seeking traders. The European Central Financial institution, in the meantime, is predicted to continue to lag behind the Fed in tightening financial coverage.

These components have despatched the euro and greenback swinging wildly this year—together with Thursday, when the euro rose 1.2% in opposition to the greenback, its largest leap in additional than two months. The euro reversed a few of these positive aspects 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 compelled some analysts and traders to revise expectations for parity in current weeks. 

“For us, the percentages of [the euro and dollar] buying and selling at parity have gone from 30% initially of the Ukraine conflict 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 of a psychological degree for the foreign money pair, euro-dollar parity additionally has necessary implications for native economies and customers’ wallets. For Individuals touring overseas this summer time, a weak euro means their {dollars} can go additional. 

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

“Broadly talking, a weaker foreign money has an impression 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 transferring—that’s creating difficulties for coverage makers to attempt to gauge issues like inflation.”

A weaker euro can even make euro-denominated belongings—resembling 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 proportion factors, its highest degree since Could 2020, in response to Tradeweb. On Friday, that unfold rose above 2 proportion factors once more. A widening hole between Italian and German yields is often considered 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 beneath 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 greater after falling to its intraday low of about $1.035 final week. Nevertheless, he famous, “possibly this time [parity] truly occurs as a result of persons are much less positioned for it.”

Latest information from the Commodity Futures Buying and selling Fee reveals that leveraged funds as of final week held a modest internet brief place in opposition to the euro—however are much less bearish in opposition to the foreign money than they have been at factors final yr. 

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

“I believe if we’re transferring into an setting the place you will have these dangers constructing for the eurozone—largely as a result of vitality safety but additionally the China slowdown—there may be the likelihood that die laborious bulls will probably be giving up,” she mentioned.

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