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The euro sinks below parity against the dollar as Gazprom pipeline shutdown stokes recession worries

The euro fell below the value of the US dollar on Monday, slipping below parity on fears over a gas shortage worsening in Europe. The decline took place just days before the Federal Reserve was expected to stress its aim of clamping down on high inflation at its symposium in Jackson Hole, Wyoming.

The euro fell 0.7% to $0.9968, marking the second time in a month and this year the shared currency has traded below $1 against the greenback. The latest move came after Russia's state-run energy company Gazprom on Friday unexpectedly said it would close the Nord Stream 1 pipeline into Europe for maintenance between August 31 and September 2.

Benchmark European natural gas prices soared Monday and Gazprom's move stirred speculation about a prolonged closure of the key pipeline.

"The energy shock seems sure [it will] drive Europe into a recession," Marc Chandler, chief market strategist at Bannockburn Global Forex, in a Monday note in which he outpointed European natural gas prices have jumped by almost 380% so far in 2022.

"Only a recovery of the $1.0050-60 area helps stabilizes the tone," for the euro, said Chandler, who also noted the eurozone's preliminary reading on August industrial and services activity was due Tuesday. The composite PMI is expected to show a deepening contraction.

The euro has dropped 12% against the US dollar this year in part as Russia has been squeezing gas flows into Europe since the Kremlin invaded Ukraine in late February. European officials have been working on stockpiling gas and managing soaring energy prices as the winter season approaches.

The euro has also been pushed lower with US Treasury yields climbing as the Federal Reserve has ramped up interest rates. Fed officials will gather this week for their conference in Jackson Hole, Wyoming, culminating in a speech by Fed Chairman Jerome Powell on Friday.

Powell is widely expected to focus on swaying market expectations to reflect that the Fed is still on a hawkish path in monetary policy and hasn't yet pivoted to signaling rate cuts.

Powell is " likely to sound resolute, and committed to beating inflation," Societe Generale said in a note Monday. The "impact so far has been to spark a very sharp rise in global bond yields which, along with last week's soft Chinese data, send global equities into a bit of a funk and gave the dollar a big boost. All that talk of the dollar having peaked is looking a bit jaded."

Inflation in the US was running at a hot rate of 8.5% in July even as it cooled from 9.1% in June, a 41-year high. Powell will speak on Friday at 10 a.m. Eastern.

[Source: By Carla Mozée, Insider, NY, 22Aug22]

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