LONDON: The euro was trading near 22-month lows on Tuesday as war in Ukraine darkens Europe’s economic outlook, while currencies lifted by rocketing energy prices paused after a weeks-long rally.
Russia’s invasion of Ukraine has led to increased demand for assets seen as safer across markets, with the dollar - the world’s reserve currency - up around 3% over nearly two weeks as the crisis has intensified.
The euro regained ground on the day after five sessions of declines, but is still trading near a trough of $1.08060 on Monday - its lowest since March 2020 when the COVID-19 pandemic gripped Europe.
Russia’s offensive in Ukraine continued on Tuesday but at a slower pace, though fighting is showing no signs of abating. Russia calls its actions a “special military operation”.
The crisis has led to soaring energy prices and concerns about inflation and a possible hit to global economic recovery.
“The price action appears to reflect building concerns over a sharper slowdown/recession for the global economy on the back of the energy price shock,” currency analysts at MUFG said in a note.
“The weakening growth outlook for the euro-zone economy is already reflected by the weaker euro.”
The dollar index was broadly flat on the day at 99.146 , while the euro was last up 0.2% at $1.08795.
The single currency was briefly trading at parity with the Swiss franc on Monday for the first time in seven years, but again gained some ground, last up 0.6%.
Traders are expecting choppy markets, with euro/dollar volatility gauges at their highest since the market chaos of March 2020. Overall forex volatility gauges were also up to the highest level since April 2020.
Although Germany’s opposition to a ban on Russian energy imports knocked oil futures from Monday’s 14-year peak, analysts expect the supply shock to persist and hold back growth.
The ECB meets on Thursday with the spectre of stagflation prompting economists to suggest policymakers might delay rate hikes until late in the year.
Sterling was last up 0.2% at $1.31270 after falling to a new 16-month low of $1.30830 earlier in the trading session.
The yen dipped slightly to 115.57 per dollar.
Besides commodities’ rally, the war and subsequent Western sanctions have crushed Russian assets, with the rouble falling to a record low of 160 to the dollar in erratic offshore trade on Monday. The rouble firmed slightly in thin offshore trade on Tuesday.
Commodities and exporters’ currencies paused on Tuesday, with the Australian and New Zealand dollars off Monday’s four-month peaks. Traders are starting to fret that in the longer run sky-high commodity prices could become a drag on world growth.
The Aussie was last down a third of a percent at $0.72905, while the kiwi was broadly flat at $0.68290.