The euro tumbled down by more than 1% against the U.S. dollar on Monday. It was on track for its biggest three-day loss in two years as surging oil prices stoked fears of a stagflationary shock. The latter could hammer European recovery hopes. The common currency’s decline was broad-based. The euro flirted with parity against the Swiss franc after briefly falling below it in early Asian trading. The currency plummeted down by more than 0.5% versus the Japanese yen and the Australian dollar, as well.
Meanwhile, the conflict in Ukraine and harsh international sanctions on Moscow have caused Russian assets to tumble down. Prices of the country’s exports such as precious metals, gas, and oil had rallied. At the same time, the global economy struggled with inflationary pressures.
Europe is the most vulnerable, considering that it imports as much as 40% of its natural gas from Russia. As a result, the common currency has become increasingly correlated with oil prices – the higher oil prices soar, the more the euro declines. Traders fret about higher inflation and the blow to the economy.
John Hardy, the head of FX strategy at Saxo Bank, noted that the euro continues to absorb the most pressure of major currencies on the fallout from the war in Ukraine. On Monday, the euro dropped by more than 1% to $1.0806 in volatile London trading, reaching a May 2020 low. On a cumulative basis, the currency has lost almost 3% versus the U.S. dollar in the last three trading sessions, experiencing its biggest plunge since the pandemic slammed into markets in March 2020. Overall, it shaved off almost 4% since Russia began what it calls a “special military operation” in Ukraine.
How will the soaring oil prices influence the markets?
Oil prices rallied again on Monday. The risk of a U.S. and European ban on Russian products, along with delays in Iranian talks, boosted prices to the highest levels since 2008. An FX strategist at a European Bank in London stated that the melt-up in commodity prices increases the risk of a stagflationary shock for the eurozone. It also complicates the policy outlook for the ECB.
Furthermore, Goldman Sachs announced that a sustained $20 oil rise shock would lower real economic growth in the eurozone by 0.6% and by 0.3% in the United States. However, in a more adverse scenario, if Russian gas shipments via Ukraine were curtailed, the eurozone GDP could drop by as much as 1% from gas alone.
Against the Japanese yen, the euro plummeted down to a 15-month low of 124.39 yen. It touched its lowest since mid-2016 versus the sterling at 82.01 pence, as well. Against the Australian dollar, the common currency has lost more than 10% over about a month. On the other hand, the dollar jumped by 0.5% to 99.40 against a basket of its rivals, hitting its highest levels since May 2020.
The Indian rupee hit record lows on Monday
The Indian rupee dropped to a historic low today, while bond yields soared. A sharp jump in global crude oil prices stirred fears about domestic inflation while simultaneously strengthening prospects of interest rate hikes by the central bank.
India currently imports more than two-thirds of the oil it needs. High prices will likely widen the country’s trade and current account deficits, as well as boost imported inflation.
On Monday, the partially convertible rupee traded at 76.96 against the dollar, near its record low of 76.97 reached earlier in the session. On Friday, the currency closed at 76.16. The rupee hit its previous record low of 76.9050 on April 22, 2020, during the coronavirus pandemic.
Meanwhile, Brent crude skyrocketed to almost $130 a barrel, its highest price since 2008. The United States and European allies contemplated a Russian oil import ban. However, delays in the potential return of Iranian crude to global markets fueled tight supply fears.
According to the latest data, foreign investors had sold $862.56 million worth of shares last week, pushing the total sales in 2022 to $11.25 billion.
A senior trader at a foreign bank noted that stocks continued to trade in the red. Analysts talk about sustained selling by foreign funds. Even though RBI would prefer to sell dollars sporadically, they wouldn’t want to come in too heavily against the tide.
