The euro-dollar exchange rate fell to a 20-year low

BLOOMBERG, FINANCIAL TIMES

The escalation of the energy crisis with Moscow's aggressive, if predictable, decision to shut down the Nord Stream 1 pipeline indefinitely sent the euro plunging again, this time below 99 cents to the dollar. After two decades, the single currency fell 0,7% to 98,80 cents to the dollar yesterday morning, reflecting ominous market assessments of Europe's energy security and a looming recession in the Old Continent.

While Gazprom as usual cited a technical problem, the news came hours after G7 countries announced plans to impose a price cap on Russian oil sales, partly as a measure to deal with the energy crisis and partly to to hurt Moscow's revenues with which it finances the invasion of Ukraine. As it now translates into continued pressure on the euro, the energy crisis is now also making it difficult for the ECB, which is expected to raise interest rates aggressively to tackle inflation.

The reaction of the European countries was immediate, as Germany was the first to announce measures over the weekend that will stop the rise in energy prices, but also in general the cost of living. In a move that betrays the seriousness of the matter, Germany on Sunday announced a program to support households and businesses totaling 65 billion euros, and Finland a corresponding program of 10 billion euros. It was preceded on Saturday by Sweden, which announced a package of measures worth 23 billion to support utility companies. And Goldman Sachs predicts the euro will fall to 97 cents to the dollar within the next three months and remain below one-to-one parity for a six-month period. The estimates are, after all, ominous for Europe as the shortage of energy resources portends a long and difficult winter for the Old Continent and its economy, while the ECB is forced to raise interest rates.

Speaking to the Financial Times, Brian Martin, head of economic research at ANZ, emphasized that "the work of the ECB is significantly complicated by the uncertainty surrounding the supply of Russian natural gas." He added that the market has already priced in a 0,5 percentage point rise in interest rates, but "Moscow's decision to cut fuel supplies indefinitely increases the risk of a recession and the possibility of an acceleration in inflation." Similarly, Rodrigo Catril, foreign exchange analyst at National Australia Bank, emphasized that "a lack of natural gas means a lack of growth and it also means that the ECB's monetary policy will be restrictive."

Expectations for a 75 basis point increase in ECB interest rates at Thursday's meeting are steadily building among market players. At the same time, however, analysts and economists emphasize that it is extremely difficult to take the relevant decision for the Bank, as President Christine Lagarde and her colleagues must manage the twin problems of inflation and the looming recession.

As Sue Lin Ong, head of investment strategy at Royal Bank of Canada, points out to Bloomberg, "at some point banks will start asking how much inflation central banks are willing to tolerate if economies slide into recession." She emphasized that "the price that will ultimately be paid will be weaker growth or recession and worsening labor market conditions", but added that "as long as energy prices remain at high levels for a long time, they limit the room for maneuver of the ECB both at this week's meeting and in general".