Euro Sinks to Seven-Month Low Against Dollar on Oil Crisis

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(Bloomberg) — The euro fell to its lowest level since August amid broad gains for the US dollar as the Middle East war escalated.

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The common currency slipped as much as 0.6% to $1.1446, its lowest level in more than seven months. It’s down more than 2% this year as soaring energy prices threaten Europe’s economy.

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The latest move came as the greenback strengthened against all Group-of-10 peers on Friday amid ongoing strikes in the Middle East. The euro was already under pressure as oil prices above $100 per barrel underscored Europe’s perennial vulnerability: when energy costs spike, the trade balance deteriorates and the currency takes a hit.

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The euro has weakened even as money markets now favor two European Central Bank interest-rate hikes this year, a sharp shift from pricing last month when no move was expected. The reversal underscores how energy-driven growth fears are eclipsing rate support for the currency.

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The dollar, meanwhile, is getting a boost from the US’s position as the world’s top oil producer and by the greenback’s role as the currency of the global crude trade. It’s also gained as inflationary fears prompt traders to pare back expectations of easing from the Federal Reserve this year — with just 16 basis points of cuts now implied by swaps. 

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Attention is shifting to the ECB’s monetary policy meeting next week, when traders will closely watch President Christine Lagarde’s response to the crisis. Earlier this week, she said policymakers would ensure the war in Iran doesn’t inflict the same inflation pain on the euro zone as Russia’s invasion of Ukraine did.

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The ECB should “keep rates on hold and highlight that recent energy price developments have added a layer of uncertainty to its growth and inflation outlook,” Credit Agricole SA’s head of G10 FX research and strategy Valentin Marinov wrote in a note. 

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The euro “could struggle” further if the ECB disappoints the current hawkish market expectations, Marinov added. He does not expect the central bank to go as far as validating the hikes that are currently implied by swaps. 

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