Euro Plunges On Italian Politics, Energy Concerns

U.S. dollar banknotes are displayed in this illustration taken, February 14, 2022. Reuters / DADO RUVIC

The euro plunged below parity to a 20-year low on Thursday as concerns over an energy crisis and political turmoil in Italy dented demand for the single currency, while the U.S. dollar was boosted by expectations of aggressive Federal Reserve rate hikes.

Italian Prime Minister Mario Draghi's coalition government risked collapse on Thursday after the 5-Star Movement, one of its members, failed to support a parliamentary confidence vote including measures to offset the cost of living crisis.

The European Commission also cut its forecasts for economic growth in the euro zone for this year and next and revised upward its estimates for inflation on Thursday largely due to the impact of the war in Ukraine.

The euro plunged as far as $0.99520, the lowest since Dec. 2002. The dollar index jumped to 109.29, the highest since Sept. 2002.

"There's clearly a broader preference for the dollar in the markets at the moment given the broader context of ongoing geopolitical uncertainty, the pressures in Europe from the energy supply situation and expectations of interest rate rises in the U.S.," said Shaun Osborne, chief FX strategist at Scotiabank.

Traders have ramped up bets that the Federal Reserve will be even more aggressive in hiking rates after data on Wednesday showed that U.S. annual consumer prices jumped 9.1% in June, the largest increase in more than four decades.

Fed funds futures now indicate a 71% chance of a 100 basis points hike at the Fed's July 26-27 meeting, with a 29% chance of a 75 basis points increase also priced in.

Data on Thursday showed that U.S. producer prices increased more than expected in June amid rising costs for energy products, but underlying producer inflation appeared to have peaked.

The dollar also jumped to a 24-year high against the Japanese yen as the Japanese central bank maintains a dovish stance that contrasts with hawkish moves by central bank peers globally.

The dollar was last up 1.22% at 139.23 yen.

The Canadian dollar slipped a day after the Bank of Canada raised its benchmark interest rate by a full percentage point, surprising markets with its biggest rake hike since 1998.

The currency move may be because aggressive rate increases are also adding to fears that they will hurt economic growth, said Osborne.

"Investors are concerned that potentially the Bank of Canada is moving too fast, too quickly, there are thoughts that a policy mistake is being made here with a 100-basis-point increase given the housing sector vulnerabilities," Osborne said.

The greenback gained 1.46% against the loonie to C$1.3169.

The Australian dollar also dropped, hitting a two-year low on concerns about global growth.

The Aussie fell as low as $0.66825, the lowest since May 2020.

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Currency bid prices at 9:56AM (1356 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 108.9800 108.2700 +0.67% 13.921% +109.2900 +108.1900

Euro/Dollar $0.9977 $1.0059 -0.78% -12.21% +$1.0066 +$0.9952

Dollar/Yen 139.1150 137.4350 +1.22% +20.84% +139.3800 +137.3550

Euro/Yen 138.81 138.19 +0.45% +6.51% +139.7700 +138.0000