Such a drop would mark the first time in two decades that the euro has equaled one dollar. The euro was little changed at $1.04 Tuesday, steadying from a three-day drop.low in mid-May and has weakened 8% against the dollar this year as the Federal Reserve’s aggressive monetary-policy tightening pushed interest rates in the US well above those in Europe.
That Fed’s moves are exerting pressure on the euro because the European Central Bank is taking a less hawkish path, wrote Erik Nelson, the bank’s currency strategist. Underlying economic growth is also stronger in the US than the eurozone. “The return of USD strength has come sooner than we had expected,” Nelson wrote. “In our view, the question of parity is more of a ‘when’ rather than an ‘if.’”
Meantime, shorting the euro against the dollar is a “risk off trade” that has further room to run as US yields climb and investors pull out of risk assets. But positioning among leveraged funds is still balanced compared with other euro bottom-market cycles during which short positions were widespread, Nelson said.
“Some of those funds that tend to signal the market bottoms — they are not net short euro,” Nelson said in an interview with Bloomberg Television on Tuesday. “So we think the euro short positions and euro downside can run much further than here.”