The euro's fall to a five-year low revives the possibility that the currency will reach parity against the dollar for the first time in two decades, as fears of a eurozone recession encourage investors to place bearish bets. Russia's action to cut off gas supplies to Bulgaria and Poland was the latest blow to the currency, which is already under pressure from the double headwinds of a rising dollar and sweeping restrictions in China, the bloc's main export market. Germany and other European countries could be next in line to impose gas restrictions.According to Kaspar Hense, senior portfolio manager at Bluebay Asset Management in London, the embargo on Russian oil and gas could send the European economy into recession sooner than expected.The single currency fell to a low of $1.0514 against the dollar, resulting in an April loss of 4.5%.Data on Germany, the eurozone's largest economy, showed that consumer confidence is at an all-time low and the government has sharply lowered its growth forecasts for 2022.The euro has fallen steadily since peaking at $1.6 in 2008.
This is because markets are ready for a much more aggressive tightening by the US Federal Reserve. Money markets are on the lookout for a 1% rate hike in the US at the next two meetings.However, ECB interest rates, which are currently at -0.50%, will not rise to US levels this year or next.According to Craig Inches, head of rates at Royal London Asset Managemen, the eurozone is really only talking about taking the deposit rate out of negative territory and possibly back into slightly positive territory by the end of the year. That means that the European currency is depreciating.Craig Inches stressed that the fall in the euro against the currencies of trading partners was worrying for bond investors as it could exacerbate and leave inflation at 7.4%.Due to the weakness of the currency, a worsening inflation outlook is forcing a revaluation of bond yields. Are investors compensated in long-term bonds given the future inflation risk? For example, 10-year German bonds made little sense at yields of less than 1%.