The euro plunged below $0.99 on Monday for the first time since the end of 2002, as the European currency suffered from fears for the European economy after the announcement on Friday of the complete shutdown of the Nord Stream 1 gas pipeline by the Russian Gazprom. The euro fell 0.25% to 0.9929 dollars around 1:35 p.m. GMT (3:35 p.m. in Paris), after falling to 0.9878 dollars, its lowest level since December 2002, the year it was put into circulation. Since the beginning of the year, the European currency has lost 13% against the dollar.
The G7 countries targeted Russia’s energy windfall on Friday by agreeing to cap the price of its oil, provoking a reaction from Moscow that shook Europeans by announcing that the Nord Stream 1 gas pipeline, vital for the energy supply of Europe, would be totally stopped until a turbine was repaired.
This stop is deemed, from a technical point of view, unjustified by the turbine manufacturer Siemens Energy. “When Russian President Vladimir Putin recognized the separatist regions of eastern Ukraine and sent + peacekeeping + troops at the end of February”, the European currency “had fallen below 1.15 dollars”, and “at each escalation of the conflict, armed or energy, the euro gave up a little more ground”, recalled Kit Juckes, analyst at Societe Generale.
The jump in gas prices and the lack of energy that is looming for the coming winter is undermining the budgets of consumers and businesses alike and threatens to plunge the euro zone into recession.
After brushing its historic record of 345 euros per megawatt hour on August 26, set in March at the start of the war in Ukraine, the Dutch TTF futures contract, a benchmark for the natural gas market in Europe, had plunged last week. It was up again by almost 15% on Monday.
In this context, the prospect of a marked tightening of monetary policy by the European Central Bank (ECB), at its meeting on Thursday, was not enough to strengthen the euro on Monday.
Conversely, the dollar continues to benefit from its status as a safe haven, which “more than offsets a slightly less enthusiastic than expected employment report (published) last Friday”, commented Lee Hardman, analyst at MUFG.
It is difficult to predict how far the decline of the euro could lead it, while the currency remains for the moment far from its historical low of 0.8230 dollar in October 2000.
“Some of the bad news is already priced in, but that may just limit the downside; the direction of the move remains down,” Juckes warns.
The pound sterling also faltered on Monday, with the United Kingdom particularly vulnerable to fluctuations in the price of gas, the energy on which the country depends. The British currency fell 0.06% to 1.1502 dollars, after falling to 1.1444 dollars, a new low since the containment of March 2020 and the shock of the start of the pandemic.
Liz Truss won the race to become Prime Minister and succeed Boris Johnson on Monday, with the immediate challenge of tackling the historic purchasing power crisis gripping the UK.
His victory, widely anticipated by the markets, did not cause any significant movement in the pound in the middle of the session.
“Markets will scrutinize all proposals on tax and spending, aid to households and businesses is crucial to restore the attractiveness of investment in the United Kingdom”, noted analysts at Sucden.
“The pound needs huge fiscal support given the gloomy outlook, but this support needs to be well directed,” say Deutsche Bank analysts, who point to the risk of a debt crisis similar to that of the 1970s, when the United Kingdom had to appeal to the International Monetary Fund (IMF) to bail out its coffers.
If the British pound falls below the $1.1412 threshold, it will move to its lowest since 1985.