The decline of Europe’s common currency reflects growing fears of recession in a region gripped by inflation and growing uncertainty about its energy supplies. In the United States, soaring prices pressed the Federal Reserve to tighten monetary policy in a bid to rein them in, rattling markets, experts said.
“There has been an enormous amount of pessimism in recent months,” said Kristina Hooper, chief global market strategist for Invesco.
Earlier Tuesday, the euro hit its lowest point since 2002 to move nearly even with the U.S. dollar. The common currency dropped as much as 1.3 percent to $1.0002 at one point, a 12 percent slump since the start of the year that analysts attributed to a combination of forces, including the continent’s energy crisis sparked by the Russian invasion of Ukraine and the European Central Bank’s lagging actions on inflation.
Europe’s heavy reliance on Russian gas left member nations especially vulnerable when the European Union decided to cut Russian imports in response to the invasion. Russian President Vladimir Putin later mandated that buyers from countries that imposed sanctions pay for gas in rubles, which helped boost his nation’s currency and weakened the euro.
Meanwhile, Russia also split its supplies via its biggest pipeline to Europe. On Monday, the main natural gas pipeline between Russia and Germany shut down for scheduled maintenance, raising concerns that Moscow could use it as an excuse for a longer shutdown.
The weakened euro could intensify the bloc’s struggles with inflation, which in June swelled to 8.6 percent, the highest level since the euro was created in 1999. Imports would become more expensive under a weaker currency, making it harder for the central bank to bring inflation back to 2 percent, a rate it equates with price stability.
But exerts say there are benefits for American consumers because it will insulate them from “even worse inflationary pressures.” However, for companies with international trade exposure, the decreasing euro value could affect their sales, said Christopher Vecchio, Senior Strategist at financial analytic firm DailyFX.
U.S. Treasury Secretary Janet L. Yellen traveled to Asia this week intent on winning support for a proposed price cap on Russian oil at the Group of 20 finance minister meetings. Such a cap would bar Moscow from selling its oil at elevated prices, which have contributed to inflation. On Tuesday, she and Japan’s Finance Minister Shunichi Suzuki agreed that both sides would pursue price caps “where appropriate.”
On Wall Street, investors are closely monitoring second-quarter results, which begin in earnest this week, for insights on how businesses are faring against soaring inflation.
On Tuesday, PepsiCo reported better-than-expected revenue and earnings per share as consumers were left to pay more for its namesake soda and snacks like Doritos. Sales rose more than 5 percent, to $20.2 billion, from the year-ago period. It also earned $1.86 a share
Investors will be closely monitoring results from the major banks, including JPMorgan Chase and Morgan Stanley on Thursday, and Wells Fargo, PNC Financial and Citigroup on Friday, to gauge the health of the economy.
“There is little doubt that a major focus of the … earnings calls will feature a wide range of remarks noting how the strong [U.S. dollar] has weighed down companies’ performance overseas,” Vecchio said. Though it’s unclear how that will play, he added.
Oil prices also bent back, with Brent crude, the international benchmark, toppling nearly 8 percent to fall below $100 per barrel. The U.S. benchmark, West Texas Intermediate crude, plunged 8 percent to $95.65 per barrel. The first case of the coronavirus B. A. 5 variant in China was the primary driver, raising fears the county’s zero-covid policy could slash demand.
The yield on the 10-year Treasury fell to 2.945 percent. Bond yields, which move inversely to prices, reached their high in mid-June after the Fed raised the interest rates, but then floated downstream. Experts said that investors opted for safe havens like bonds amid recession fears and drove them away from riskier assets like stocks.
On Wednesday, the Bureau of Labor Statistics will release inflation data for June. In May, the consumer price index rose 8.6 percent, a 40-year high.