Euro on course to stay below US dollar parity for some time, Goldman warns

The euro is on course to stay below parity with the US dollar for some time if gas prices do not fall markedly, a top Wall Street bank has said.

The currency used by the 19 countries that make up the eurozone is set to drop to $0.94, according to Goldman Sachs.

The euro last week closed a shade below parity with the greenback.

However, Goldman, in a note to clients over the weekend, predicted the currency could stay there for years if gas prices solidify above their historically low levels.

“The euro area’s deteriorating external balance is a direct manifestation of its worsening terms of trade under higher prices for energy products and manufactured goods, and this would have important implications for the euro if it is sustained,” the Wall Street titan said.

Russia’s invasion of Ukraine has jolted international markets, sending commodity prices soaring. 

Elevated gas prices have squeezed Germany and Italy’s economies due to their historic reliance on Moscow energy supplies.

Euro/US dollar exchange rate over last year

Because European countries are paying punitively high prices for energy, their trade positions have deteriorated markedly. Germany has swung from a trade decades long surplus to a deficit.

A trade deficit oversupplies a country’s currency on international financial markets, weakening it against its competitors. 

Goldman also noted steep interest rate hikes from the US Federal Reserve have shored up the dollar by strengthening the attractiveness of American assets.

“If the looming recession prompts the [European Central Bank] to take a more cautious approach, as we expect, even as the Fed aims for a higher terminal rate” then the euro could continue to tumble, the firm said.

The Fed has raised borrowing costs 375 basis points since March, a much faster rate hike cycle than the ECB’s 200 basis points.