Euro hits 20-year low as Russia turns off gas supply

SINGAPORE – The euro fell below 99 US cents for the first time in nearly two decades, while the pound was on the ropes on Monday as Russia’s halt on gas supply down its main pipeline to Europe sparked concerns over energy prices and growth.

The euro slid to US$0.988 in Asia trade, the lowest level since 2002, while sterling hit a new 2½-year low at US$1.14445, and remained close to its pandemic trough.

Meanwhile, the US dollar index, which measures the greenback against a basket of six currencies with the euro the most heavily weighted, hit a new two-decade high, surging to a top of 110.25.

Russia scrapped last Saturday’s deadline for flows down the Nord Stream pipeline to resume, citing an oil leak in a turbine. It coincided with the Group of Seven finance ministers announcing a price cap on Russian oil.

The pound has also been weighed down by concerns over rising energy costs. British Foreign Minister Liz Truss said over the weekend that she would set out immediate action to tackle rising energy bills and increase energy supplies if she is to become Britain’s next prime minister, as expected.

“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 (Russian President Vladimir) Putin,” said Citigroup Global Markets chief FX strategist Osamu Takashima.

The yen, at 140.38 per dollar, was under pressure near a 24-year low. The risk-sensitive Australian dollar slid 0.41 per cent and was near a seven-week low at US$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 Mr 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.”

Outsized rate hikes are on the cards this week. Markets have priced a near 80 per cent chance of a 75 basis point (bp) hike in Europe and an almost 70 per cent chance of a 50 bp hike in Australia.

“One would have anticipated that a hawkish ECB (European Central Bank) should deliver some kind of a tailwind to the euro. But instead what you might get is the policy trade-off and dilemma biting in,” Mr Varathan said.

In the United States, pricing for a 75 bp hike this month has pared back somewhat after a mixed jobs report last Friday that contained a few hints of a loosening labour market.

Fed funds futures imply about a 58 per cent chance of a 75 bp hike .

Elsewhere in Asia, the offshore yuan similarly fell to a fresh two-year low at 6.9543 per dollar, as worries linger over Covid-19 lockdown measures in China.

China’s southern tech hub of Shenzhen said it would adopt tiered anti-virus restriction measures beginning on Monday, while Chengdu announced an extension of lockdown curbs as the country grapples with fresh Covid-19 outbreaks. REUTERS