The euro is trading down against the backdrop of the escalating war in Ukraine, raising questions regarding the European Union’s near-term economic prospects. Traders may be attracted to the U.S. dollar at the expense of other currencies as global economic and geopolitical uncertainty looms.
Euro Trades Down
The Russian aerial assault on major Ukrainian cities like Kharkov and Kyiv has intensified this week. In response, Western powers, including the United States, United Kingdom, and European Union, have implemented a raft of severe sanctions on the Russian Federation which have led to economic turmoil in the country. A freeze on the Bank of Russia’s assets crippled the central monetary authority’s ability to prop up the ruble’s value using currency reserves, leading it to keep Moscow’s stock market closed for trading so far this week. However, market uncertainty stemming from this ongoing crisis has not been limited to the ruble’s exchange rate; another key Forex pair is now being affected.
Prior to the outbreak of hostilities in the post-Soviet space, many market watchers had posited that the pan-European economy was on the road to recovery from the doldrums of the COVID-19 pandemic. The outlook may be less rosy now that the specter of military clashes on a scale unseen since 1945 spreads its shadow over the continent.
Last week, the euro fell to its lowest level when measured against the dollar since June 2020. As of the time of writing, the EUR/USD (EURUSD) pair was trading at under $1.11, a 0.5% fall since Tuesday and the exchange pair’s lowest value since May of 2020. One major factor for this fall could be investors’ concern surrounding the possibility of disruptions to energy supplies from Russia to Europe.
Lights Out in Europe?
Although exports of Oil and Natural Gas (NG) westward from the Russian Federation have thus far not been included in the sanctions’ purview, the mood on the energy markets seems to be jittery. Last week, the German government announced the suspension of the Russian-owned gas pipeline Nord Stream-2, which has forced its Swiss-based project company to file for bankruptcy.
The effects of increasing sanctions on the Russian energy sector could have a ripple effect far beyond the suspended pipeline. Just in the past two days, British Petroleum (BP-L) has moved to divest from Russian holdings, and French-based energy giant Total (TTE.PA) has announced its intention to cease funding for new projects in the country. Amid increasing pressure from Western firms to halt investment in the Russian Federation, some market watchers have raised the prospect of a shipping ban being imposed on Russian ships in addition to the closing of airspace to Russian planes announced on Monday. This would, of course, impede the transport of key Commodities from their production point in Russia to EU member states.
Given that 40% of Natural Gas consumed in the European Union, and one-quarter of its Crude Oil (CL), come from Russia, such moves could negatively impact the 27-member bloc’s economy. With Oil already nearing $110 a barrel as of Wednesday morning, the possibility of further scarcity-induced price jumps may be pushing investors away from the euro. Traders may be looking to the greenback as a safe haven asset; the U.S. Dollar Index (DX) was trading up by nearly 0.4% as of the time of writing.
Much has yet to be revealed about the near-term trajectory of the bloody crisis in Ukraine and its effects on various nations’ currencies. In an environment of such deep uncertainty, it is not yet clear whether the euro will continue its slide or climb back up.