The euro has tumbled to a five-year low against the US dollar as investors bet the European Central Bank will struggle to match the pace of monetary tightening across the Atlantic, particularly as the war in Ukraine casts a shadow over the bloc’s economic recovery.

The European common currency fell further on Wednesday after hitting its weakest point since April 2017 late in the previous New York session, according to Refinitiv data. It has declined steadily since early February as traders responded to increasingly hawkish signals from the US Federal Reserve, which is expected to raise interest rates rapidly as it fights soaring inflation.

While markets have also begun to price in an end to ultra-loose monetary policy in the eurozone, the ECB is expected to tread carefully, given the threat to the region’s economy from soaring energy prices that could worsen if the bloc decides to impose sanctions on Russian oil and gas exports.

Wednesday’s losses for the euro come after Russia suspended gas supplies to Poland and Bulgaria, triggering a sharp rise in European gas prices.

This week, a rush to the safety of the dollar amid concerns about the resurgence of coronavirus in China has pushed the euro beneath the lows it fell to at the height of the pandemic.

“The market is convinced that the Fed will be more aggressive than the ECB under pretty much any scenario,” said Athanasios Vamvakidis, head of foreign exchange strategy at Bank of America. “I think we are seeing a long overdue capitulation from investors who had been reluctant to go short [the euro against the dollar].”

Despite notching up new lows against the dollar, the euro has fared better against many other major currencies. The euro is up against the Japanese yen, the British pound and the Swedish krona so far in 2022.

That broader buoyancy suggested there was room for the euro to decline further, including against the dollar, said Vamvakidis.

“It’s maybe early to talk about parity [with the dollar],” he said. “But if we think about what else could go wrong for the euro, then I think with sanctions on Russian energy we could indeed get there.”

Gazprom’s halt to Polish and Bulgarian gas supplies, which came after Russia said the two countries had failed to make payments for the gas in roubles, also hit eastern European currencies. The Polish zloty has lost more than 2 per cent against the dollar in the past two days, although it still remains above the level it fell to in early March, shortly after Russia’s invasion of Ukraine. The Hungarian forint and Czech koruna have also declined.



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