| 13 July 2024, Saturday |

Euro faces pressure as parity concerns resurface amid surging US yields

Bloomberg reported that concerns about the euro returning to parity with the US dollar are resurfacing in market discussions, less than a year after the common currency was at an equal exchange rate with the dollar.
In recent weeks, financial analysts at firms such as Nomura International Plc, Rabobank, and ING Groep NV have revised their forecasts, bringing the euro close to the $1 mark. The term “parity” has seen a significant uptick in Google searches, and the probability of the euro reaching parity by early next year has more than doubled, as per a Bloomberg options model.

As per the Bloomberg report, the resurgence of these concerns can be attributed to multiple factors. US yields have been climbing rapidly, bolstering the strength of the dollar. Domestically, growth in the eurozone’s major economies remains sluggish, renewed worries about Italy’s high government debt load have emerged, and increasing energy prices are rekindling fears of inflation.
Jordan Rochester, an FX strategist at Nomura, was quoted by Bloomberg as saying, “If oil prices surge past $110 per barrel, it will be difficult for the euro to avoid parity.” He also mentioned, “The levels of US rates suggest that the euro should be at $1.01 to $1.03 already.” Currently, the euro is trading around $1.06, with Rochester revising his year-end forecast from $1.06 to $1.02.

Citing Stephen Jen, CEO at Eurizon SLJ Capital, who emphasised that even if parity isn’t reached, the Bloomberg report indicated that the growing risk of such an occurrence indicates that the odds are not in favour of the euro. He attributed the euro’s weakness to the sluggish European and Chinese economies, contrasted with strong economic activity in the United States, which is creating a scenario of continued dollar strength and euro vulnerability.

Additionally, Michael Metcalfe, Global Head of Macro Strategy at State Street Global Markets, mentioned that investors continue to show a preference for maintaining their underweight euro positions. The evolving economic landscape and the surge in US yields have cast a shadow of uncertainty over the euro’s future trajectory, making it a crucial element in the ongoing market dynamics.

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