LONDON — The euro slipped back below parity against the dollar on Wednesday and was on track for its third consecutive monthly drop as a burgeoning energy crisis is set to weigh on the bloc’s growth, while the European Central Bank (ECB) pushes ahead with rate hikes.
On Wednesday, Russia halted gas supplies from the Nord Stream 1 pipeline, intensifying an economic battle between Moscow and Brussels and raising the prospects of a recession and energy rationing in some of the world’s richest countries.
“The narrative that has helped the euro at the start of the week, which is an improvement in the gas story, is fading now which we think will put a cap on euro-dollar,” said ING currency strategist Francesco Pesole.
The euro was down 0.17% against the dollar, just slipping below parity at $0.99965.
Meanwhile, a growing chorus of ECB officials have been calling for oversized rate hikes to combat surging inflation, which could exceed 10% in the coming months.
Inflation in Germany, the euro zone’s largest economy, hit its highest level in almost 50 years in August, data showed on Tuesday, which has markets pricing a better-than-even chance of a 75 basis point rate rise at the ECB’s meeting next week.
Norway’s krone tumbled over 1% against the dollar and euro after the country’s central bank said it would buy more foreign currency for its sovereign wealth fund.
It was last down 1% against the dollar at 9.8884, hitting its lowest level in a month. Against the euro, the krone was down 0.7% at 9.8833, having earlier touched its lowest level since Aug. 10.
The dollar index, which measures the greenback against a basket of six currencies, was last flat at 108.76, hovering just below a two-decade peak reached on Monday of 109.48.
The index is on track for its third consecutive month of gains, having risen over 2.5% in August.
Eyes are turning to U.S. nonfarm payrolls data due on Friday, with a robust job openings data on Tuesday potentially foreshadowing a strong showing at the end of the week, cementing the case for more aggressive rate hikes.
Federal Reserve officials on Tuesday reiterated their support for further rate hikes to quell inflation, with New York Fed chief John Williams telling the Wall Street Journal that it will “take some time” before interest rates would be cut.
Traders are now pricing in about a 68.5% chance of a 75 bps Fed funds rate hike next month, according to data from Refinitiv.
Chinese data out on Wednesday showed that factory activity in the world’s second-largest economy contracted again in August, as new COVID infections, the worst heatwaves in decades and a property sector crisis weighed on production.
Still, China’s yuan rose past the key threshold of 6.9 per dollar as a persistently firmer-than-expected official guidance rate discouraged investors from aggressively pressuring the local currency lower.
Cryptocurrencies were staging a rebound on Wednesday, with Bitcoin up 2.4% to $20,291, and Ether, the coin linked to the ethereum blockchain network, up 4.4% to $1,590.
(Reporting by Samuel Indyk; Editing by Kim Coghill)