The euro is trading at a new two-decade low on Tuesday at 0.99 against the dollar, and analysts predict the single currency will continue to fall, Greek newspaper Naftemporiki said, as cited by Rador.

“Euro hits new 20-year low on gloomy economic outlook,” writes the Financial Times in an editorial. “We expect further depreciation of the euro from where we are now,” Luis Costa, head of strategic analysis at Citibank, told CNBC.

The euro is trading at levels not seen since late 2002. Fears of tighter policy from the ECB, further inflation and higher energy prices are supporting the dollar, which is increasingly seen as a safe haven “Unlike the first time the euro fell below one dollar on July 14, the single currency does not appear to be coming back higher 1 to 1, staying below that level even at 0.9900 in a kind of free fall that appears to be worrying,” analysts commented on ActivTrades, calling the ECB’s silence “deafening.”

“The last barrier for the euro was $0.8225 in 2000, a year and a half after the birth of the single currency, when most investors still considered it a virtual currency,” they add.

Roelof-Jan Van den Akker, a strategy analyst at ING, also sees further weakening of the single currency and a fall “between $0.80 and $0.75 in the coming months.” As he also told CNBC, this development “confirms that there is strength in the dollar and weakness in the euro.”

Onslaught of the Fed

The weakening of the euro is also facilitated by the aggressive policy of raising interest rates by the US Federal Bank (Fed). Many investors now expect the Fed to raise interest rates again by 75 basis points on September 21. Economic data from the United States showed that the US economy remained strong, increasing the Fed’s margin for sharp interest rate hikes. It may well be that the US is technically in a small recession right now, and Europe has not yet reached it. But the United States does not have such energy problems and rapidly rising energy prices as Europe. Most likely, the energy crisis will hit Europeans much harder than Americans in the coming months.

The Fed has already raised interest rates sharply and will likely do so again in September. Thus, it makes the US dollar much more attractive, weakening the euro. The US is generally expected to raise interest rates more broadly to combat high inflation compared to the eurozone, giving the dollar an advantage against the euro.

Federal Reserve Bank of St. Louis President James Bullard, in a statement to the Wall Street Journal, advocated raising key interest rates by 75 basis points at the next meeting. “I don’t see why raising interest rates should be delayed until next year,” Bullard said. Bank Helaba experts noted that many Fed officials fully support a further increase in interest rates – even if it leads to a recession.

The euro is also weak against other currencies

If the euro were weak against the dollar, this trend could be attributed to a sharp increase in interest rates in the United States. But data over the past 12 months show a general weakening of the euro. The euro’s losses against the US dollar over the past 12 months are -15.9%, -1.1% against the British pound, -5.6% against the Norwegian krone, -11% against the Swiss franc and – 12.7% against the Canadian dollar.

In addition to the Fed’s monetary policy, the euro also suffers from its own weakness stemming from small and very hesitant ECB interest rate hikes and the fact that Europe is currently on the brink of recession. High inflation and rising energy prices are putting pressure on the economy. Europe already has a trade deficit. A very important role in the weakening of the single currency is played by the European energy crisis: fears of a gas cut in Russia continue to raise energy prices. The rise in energy prices, in turn, increases concerns about the possible onset of a deeper economic recession: “Fears of a recession in Europe make investors shy away from investing in the euro. And the stronger the economic recession, the less likely the ECB will sharply raise interest rates,” writes Italian daily Il Sole 24 Ore.

Decrease in the PMI index

According to Luis Costa, until May the markets believed that the ECB would take a “hard line”, but in recent months these plans have “collapsed”. “It is absolutely clear that the ECB’s margin for raising interest rates will be minimal,” said Citibank’s chief strategist. “The forecasts reflect concerns that inflation will continue to rise and that a recession in Europe is now imminent,” he added.

The figures of the European industry confirm the risks of recession for the Old Continent. Business activity in the eurozone fell for the second straight month in August, with new orders still falling. Cost-of-living pressures dampened demand in the services sector, while manufacturing continued to contract in the middle of the third quarter. The seasonally indexed PMI Composite Production index for the Eurozone fell to 49.2 in August from 49.9 in July.

Looking towards China

To get the full picture, we need to look beyond Europe and the United States, says Luis Costa, head of strategic analysis at Citibank. “Let’s not forget that there is an added layer of complexity because of the slowdown in China, which obviously affects Europe much more than the United States,” he said.

China posted anemic growth of just 0.4 percent in the second quarter as the world’s second-largest economy still grapples with the fallout from the pandemic in early 2020.