The euro fell to parity with the dollar for the first time in two decades

The euro effectively reached parity with the dollar yesterday as the latest recession and inflation fears saw it rally in the face of a frenetic dollar.

The single currency fell to $1.00005, marking the first time in two decades that it has reached the same level as the US currency in fractions of a cent.

It has fallen 12 percent against the dollar this year as the U.S. Federal Reserve raises interest rates aggressively and the European Central Bank (ECB) has been more dovish even as inflation has hit record levels.

Europe is facing a severe economic downturn, which could worsen if Russia cuts off gas supplies.

Elsewhere, new Covid-19 restrictions imposed in some Chinese cities fueled fears of a global recession, sending benchmark Brent crude oil below $100.

The push for the safety of the dollar has seen it trample rival currencies including the pound and Japanese yen, as well as the euro.

Sterling fell a cent to a two-year low of $1.1808 – partly due to political uncertainty as the Tories elect a new prime minister – although it later recovered. Meanwhile, the dollar eased slightly against the yen, hitting a 24-year high on Monday.

US inflation data due today could fuel further currency moves. A reading above the current 41-year high of 8.6 percent would fuel speculation that the Fed is preparing further big rate hikes.

The ECB, by contrast, has not raised rates since 2011, and while a hike is expected this month, the approach is more cautious than in the US amid fears of a recession in the eurozone.

Germany, Europe’s largest economy, bears the brunt of the continent’s energy crisis due to its dependence on Russian gas.

Some citizens have already faced rationed heating and hot water and dimmed street lights as the country seeks to conserve energy.

It could deal a major economic blow if Russia shuts down gas from the Nord Stream 1 pipeline, which was shut for ten days on Monday for maintenance, although some worry it will not reopen.

Sterling fell a cent to a two-year low of $1.1808 – partly blamed on political uncertainty as the Tories elect a new prime minister – although it later recovered

Yesterday, the ZEW index, which measures German investor sentiment, fell to minus 53.8 points, the lowest since the 2011 eurozone crisis.

Alexander Kruger, chief economist at private bank Hauck Aufhaeuser Lampe, said: “Fear has taken the wheel. The threat of a gas cut and a particularly sharp fall in real wages are causing the blues.’

Jordan Rochester, currency strategist at Nomura, expects the euro to fall to $0.95 next month, adding: “If Nord Stream 1 does not resume operations, we think $0.90 is an increasing possibility in the winter.”

The latest drop came on the same day that EU finance ministers approved Croatia becoming the 20th member of the single currency early next year.

European Commission Vice President Valdis Dombrovskis said it confirmed that the euro remains an “attractive, sustainable and successful global currency”.

Elsewhere, US Treasury Secretary Janet Yellen discussed the strengthening dollar and falling yen during meetings with Japan’s finance minister and central bank governor in Tokyo.

But Yellen said they had not discussed intervention in the foreign exchange market, telling reporters that it would be justified only in “rare and exceptional circumstances.”

In 1985, the United States, Germany, Japan, France, and Great Britain agreed to take coordinated action during another period of dollar strength to drive down the value of the American currency.

But Rabobank’s Jane Foley said the dollar’s current strength was a “textbook response” to higher interest rates and that “it would not make sense for US authorities to resist a stronger dollar if the Fed is aggressively tightening monetary policy.”