Trading currencies: what the experts think
Euro-parity, a nasty cocktail and the pound’s ‘doom loop’
Euro-parity?
Prepare for a big shake-up in the currency stakes, said Alice Gledhill on Bloomberg. For the first time in two decades, the euro “is on the verge of US dollar parity”. The EU’s common currency hit a five-year low of near $1.03 last week – “buckling from a rush into the greenback as a haven from market turmoil”. And plenty of analysts predict the two currencies will hit parity in 2022. “Hedge funds are already betting on it”: they’ve piled $7bn into “options wagers on parity” in the past month alone.
Nasty cocktail
Although the euro’s plight is largely “a function of dollar strength” – which has been “supercharged” as the US Fed presses on with big interest-rate hikes – the “darkening outlook for the European economy” doesn’t help. Not everyone is negative. Roberto Mialich of UniCredit expects the euro to climb back above $1.10 next year as the Fed’s hiking cycle tails off. But that looks a long shot. The European Central Bank “is walking a tightrope”, said Alice Gledhill, attempting to balance the need “to tame record inflation” against “the economic damage that could cause” – especially in the bloc’s most indebted member states, such as Italy. “We find it hard to see a silver lining for the single currency at this stage,” noted HSBC, pointing to downward revisions to growth forecasts and upward revisions for inflation. “This is a nasty cocktail for any currency to try to digest.”
The pound’s ‘doom loop’
We know all about that in Britain, said Liam Halligan in The Sunday Telegraph. The pound has lost a tenth of its value against the dollar this year, as the cost-of-living crisis has escalated. It is “now close to the psychologically important $1.20 benchmark”. Could it also be heading for dollar parity? Given the speed of the recent falls, it can’t be ruled out. “Sterling is now at risk of falling into ‘a doom loop’ – in which a lower pound results in more expensive imports, adding to upward price pressure. The resulting rise in inflation then pushes the pound down even more, creating a downward spiral.” The Bank of England claims it can’t do much about the global energy and food prices. “But if decisive rate rises help prevent sterling’s fall, they would help hugely in efforts to rein in rampant inflation.”
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