The euro fell to within a cent of parity with the US dollar for the first time in two decades as concerns swirled around Europe’s economic outlook and traders awaited a key market report from American employment.
The common currency fell 0.9% on Friday morning in London to $1.007, with many of its peers also falling as the dollar rose. It has fallen more than 10% this year.
Investors are increasingly worried about the eurozone economy as it faces growing headwinds from Russia’s war in Ukraine, which has helped drive record inflation. Goldman Sachs warned on Thursday that the eurozone was ‘on the brink of recession’ as Russia’s decision to cut natural gas supplies pushed up prices of vital fuel in Europe in a powerful blow. to businesses in the region.
“The probability of a recession in Europe is very high and the risk of recession has become more serious in recent weeks,” said Salman Ahmed, global head of macro at Fidelity International.
Those concerns were reflected in the bond market, with the extra yield investors can earn by holding US Treasuries relative to German Bunds, at around 1.7 percentage points on Friday, down from around 1.5 percentage points. end of June. A wider spread between these benchmark bond yields tends to be a boon for the U.S. dollar as fixed-income investors seek higher yields.
Although the United States has not been as badly affected as Europe by the war in Ukraine, concerns have also grown over whether Federal Reserve rates will rise and whether high inflation could also lead a contraction in the United States.
A report expected at 1:30 p.m. London time (8:30 a.m. Washington time) on the US labor market should shed new light on the trajectory of the world’s largest economy.
Traders will focus on whether the unemployment rate has remained near pre-coronavirus lows and how fast wages are rising, as they look for signs that inflationary trends in the labor market are easing enough for the Fed to scale back its plans for aggressive interest rate hikes .
“If you get unemployment down and the [workforce] the participation rate is also falling,” said Brian Nick, chief investment strategist at Nuveen, “you get this overheated mix that gives the Fed the green light to continue and that would be an unambiguous negative for the markets.
“The other theme that the market might latch onto,” said Marija Veitmane, strategist at State Street, “is that if we get a weak number, that means a weaker economy, and that allows the central bank to be less aggressive.
This scenario, Veitmane said, would be “bullish” for risk assets “in the short term, but not good news in the long term.”
As US inflation hits 40-year highs, the Fed raised its main interest rate an additional 0.75 percentage points in June and signaled it may do so again this month.
Stocks traded cautiously ahead of the jobs report. The European regional Stoxx 600 stock index, which gained in July after three straight months of losses, traded flat.
Futures trading signaled that Wall Street’s benchmark S&P 500 stocks, which closed up 1.5% on Thursday, would fall 0.3% at the opening bell in New York.