The euro has sunk below $0.99 – a new 20-year low – after Russia’s disruption of gas supplies through its main pipeline to Europe fueled fears of a deepening energy crisis across the region. The euro has become increasingly correlated with natural gas prices in recent months, with the former falling when prices for the energy source rose. Europe is trying to wean itself off Russian supplies and build up stocks ahead of the cold winter months, but investors estimate the hit to its economy will be huge. Russia canceled Saturday’s deadline to resume flows on the Nord Stream pipeline, citing an oil leak in a turbine. It coincided with the Group of Seven finance ministers’ announcement of a price ceiling for Russian oil. The euro fell to $0.9876 in early European trade on Monday, its lowest level since 2002, while sterling – with Britain’s economy also vulnerable to rising gas prices – fell half a percent to a new two-and-a-half-year low at 1.1444 dollars. “Natural gas flows have tightened even more than expected and we’ve already seen signs of demand destruction weighing on activity,” said Michael Cahill, strategist at Goldman Sachs. “We now expect the euro to fall further below par ($0.97) and remain around this level for the next six months,” he added. Pipes at the disposal facilities of the Nord Stream 1 natural gas pipeline [File: Hannibal Hanschke/Reuters] In a huge week for the euro, investors are also gearing up for Thursday’s European Central Bank (ECB) meeting and markets have priced in a nearly 80 percent chance of an outsized 75 basis point (bp) rate hike. . ECB officials will be keen to see the euro, which has lost 20% of its value in the past three months, stabilize. This will fuel the desire to try to tame inflation through tighter policy. Other currencies that tend to underperform when market confidence is shaken also fell on Monday. The risk-sensitive Australian dollar fell 0.5 percent and was near a seven-week low of $0.6774. The dollar’s appeal as the go-to currency this year has helped it rally even against safe-haven currencies. The Japanese yen, down at 140.35 per dollar, came under pressure near a 24-year low. “The first-order effect appears to be that heightened geopolitical risk and the resulting adverse disruptions to global demand are likely to be the dominant outcomes,” said Vishnu Varathan, head of finance and strategy at Mizuho Bank in Singapore. “Adverse demand shocks in a very unpleasant geopolitical environment will likely trigger and reflect safe-haven demand for the US dollar… European currencies will probably be the worst hit and be on the back foot. The offshore Chinese yuan fell to a fresh two-year low, with the dollar gaining 0.4 percent to 6.9543 per dollar, as concerns linger over the country’s COVID-19 containment measures. China’s southern technology hub Shenzhen said it would adopt staggered virus restrictions from Monday, while Chengdu announced an extension of lockdown restrictions as the country grapples with new cases.
