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The hopes of recovery for many foreign currencies against the US Dollar are deemed in the short term considering the fact that many Central Banks are expecting a hike in interest rate to combat inflation.
The European currency, the Euro has just plunged to a 20-year low as the energy crisis within the EU has taken a new twist with an extended halt of Russian gas to the region. The Euro fell as low as $0.9880, the lowest point since 2002 while the Pound Sterling was also dragged along with a price of $1.14445 against the dollar, the lowest in about two and a half years.
Since Russian invaded Ukraine and sanctions rained on the Kremlin, the supply of gas to the EU has remained a bargaining chip for which Vladimir Putin held onto some leverage over the West. The main pipeline that supplies gas to the EU was closed for scheduled maintenance toward the end of last month. While it was supposed to have reopened, an oil leak in a turbine has made the Scheduled Saturday reopening date impossible.
The dominance of Russian gas over the EU has made the prices skyrocket in recent times, as bolstered by inflationary pressures. With EU leaders committed to making life easy for citizens, the prolonged gas pipeline reopening coincided with an announcement of a cap on prices.
“We can’t have any confidence in the outlook for natural gas in Europe, and this is a negative for the euro. It heavily depends on Putin,” said Osamu Takashima, Citigroup Global Markets’ chief FX strategist.
Euro Plunged, Global Effect
While the Euro and Pounds have the factors fueling their depression, the dump is somewhat a global trend with the Japanese yen currently pegged at 140.38 per dollar, a figure that is close to its 24-year low. The risk-sensitive Australian dollar slid 0.41% and was near a seven-week low at $0.6780.
“The first order effect seems to be that the heightened geopolitical risk and consequent adverse global demand shocks will probably be the effects dominating,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “The adverse demand shocks in a very unsavoury geopolitical environment are probably going to trigger, and reflect, safe demand for the US dollar … the European currencies are perhaps going to be the worst hit and on the back foot.”
The hopes of recovery for many of these foreign currencies against the US Dollar are deemed in the short term considering the fact that many Central Banks are expecting a hike in interest rate to combat inflation. These potential rate hikes are bound to sustain the fragility of the economy with many countries at the brink of recession.
“One would have anticipated that a hawkish ECB should deliver some kind of a tailwind to the euro. But instead what you might get is the policy tradeoff and dilemma biting in,” Varathan said.
The global economic outlook has made many investors to stay conservative in their bets on the stock market. This may likely remain the case until some of the most visible headwinds in key economies are surmounted.