Euro Hits Two-decade Low As Gas Worries Fan Recession Fear

The euro sank to a two-decade low versus the dollar on Tuesday as a jump in natural gas prices reignited worries about the euro zone economy and data showed business growth in the region slowed sharply in June.

News that Norwegian offshore workers began a strike on Tuesday that will reduce oil and gas output added to fears about a European energy shortage.

The euro dropped by as much as 1.3% against the dollar to $1.0281, its weakest since December 2002. Versus the Swiss franc, it dropped 0.9 %to 0.9925 francs, its lowest since 2015.

The dollar index shot up 1.1% to 106.24, a two-decade high for a currency that investors tend to buy during times of acute economic uncertainty.

"Everyone is gearing up for Nord Stream to be turned off and Russia has already signaled they will use that as a weapon. So this is really hitting the competitiveness of German manufacturing," said Jordan Rochester, a currencies analyst at Nomura.

"Germany has way higher manufacturing, so we are facing a supply crunch of energy, rationing, so the euro area's competitiveness will collapse and its exports will be curtailed."

Survey data on Tuesday showed business growth across the euro zone slowed further last month and forward-looking indicators suggested the region could slip into decline this quarter as the cost of living crisis keeps consumers wary.

Elsewhere, stock markets gave up early gains as the surge in natural gas prices weakened sentiment, offsetting earlier optimism about signs of easing U.S.-China trade tensions.

After the U.S. markets were closed on Monday, trading is expected to be livelier on Tuesday and Wall Street reversed early gains and headed lower by 0825 GMT.

The Euro STOXX was last down 0.54% while Germany's DAX fell 1%. The FTSE 100 also dropped 1%.

BRIEF RESPITE

Offering brief respite to nervous markets earlier was a report that U.S. President Joe Biden was leaning towards a decision on easing tariffs on goods from China as well as news Chinese Vice Premier Liu He had spoken to U.S. Treasury Secretary Janet Yellen.

A survey showing China's services activity grew at the fastest pace in almost a year also helped sentiment.

Tuesday offers little in the way of economic data, but later this week the U.S. Federal Reserve and European Central Bank release their minutes from recent policy meetings and on Friday widely watched U.S. payrolls data will be published.

"Markets are all about recession risk," said Grace Peters from JPMorgan Private Bank.

"Inflation has been the theme since last year but since the start of June we have started to see consumers significantly changing their behaviour....The data since then whether U.S. mortgage markets or PMIs (purchasing managers index surveys) or consumer confidence shows that economic momentum has worsened considerably in Q2. That's really driving cross asset moves."

Australia's central bank hike rates again with a second straight 50 basis points increase.

However, the Aussie dollar fell 1.1% to as low as $67.82 as investors interpreted the bank's accompanying messaging to be more dovish than expected and as the U.S. currency gained across the board.

In South Korea June inflation accelerated to its fastest since the Asian financial crisis, fanning expectations the central bank could deliver a 50 basis point rate rise for the first time next week.

U.S. Treasury yields returned from the holiday little changed, with the yield on benchmark 10 year notes at 2.9%, below the 3%-plus levels of last week.

Euro zone government bond yields fell two to five basis points on uncertainty about the future path of monetary tightening by the European Central Bank and as investors fearful of the economic outlook sought safety.

As economic fears spread across markets, oil prices dropped in sympathy. Brent crude futures weakened 1.1% to $112.24 a barrel after earlier trading higher, although U.S. crude oil inched 0.1% higher to 108.5 a barrel.

Spot gold dropped 0.34% to $1803 an ounce.

Bitcoin shed 2.5% to $19,706.