As euro falls to parity with U.S. dollar, Czech crown is held steady by ČNB interventions

The euro sank to parity with the U.S. dollar, costing $1.0006 on Tuesday morning, the lowest since December 2002. Stock markets fell due to the prospect of further central bank tightening, and worries about the health of economies worldwide unnerved investors, news agency Reuters reports.

"Since the beginning of the year, the euro has weakened against the dollar by 13 percent. In recent weeks, concerns about energy supplies, a worse economic outlook, and an overall higher aversion to risk on the financial markets have pushed the currency lower," Raiffeisenbank analyst Vratislav Zámiš told ČTK. 

Komerční banka chief economist Jan Vejmělek said geographical closeness to the war and economic decline are linked. "The closer you are geographically to the focus of the conflict, the worse off you are economically due to stronger trade and financial ties. From this point of view, it is clearly worse for the eurozone than for the United States," he told news server iDnes.cz.

The euro is also being hit by expectations of further aggressive interest rate rises by the U.S. Federal Reserve, which are driving the dollar higher.

The European Central Bank also plays a role in the weakening of the euro against the dollar. Given the rapid inflation in the eurozone countries, it would be expected to raise rates. However, the ECB does not do so to a large extent with regard to its indebted southern wing.

On Monday, regular maintenance shut down the Nord Stream 1 gas pipeline through which Russian gas flows to Germany, The planned shutdown should last 10 days. European governments, companies, and markets fear that Russia may prolong the shutdown of the pipeline, deepening the energy crisis on the Continent and increasing the pressure on the EU economy.

The energy crisis is heavily affecting European industrial countries, led by Germany, which is highly dependent on gas imports. On the contrary, the United States is in a more comfortable position, as it is not dependent on Russian oil or gas.

The finance ministers of the European Union countries discussed the impact of existing anti-Russian sanctions or the economic consequences of withdrawing from Russian energy at a meeting in Brussels on Tuesday. They also confirmed the introduction of the euro in Croatia from Jan. 1, 2023.

The Czech National Bank (ČNB) has been holding the exchange rate of the crown through its foreign exchange interventions.

"As the euro weakens, there is also pressure to weaken the crown. If there were no interventions, it would be weaker, somewhere above CZK 25 [to EUR 1] It doesn't just get weaker thanks to interventions. If it developed like the Hungarian forint or the Polish złoty, it would be up to CZK 26. [The intervention] costs a lot in foreign exchange reserves," David Navrátil, chief economist of Česká spořitelna, said.

At the same time, it is yet unclear if the ČNB will raise rates any further. Despite the massive foreign exchange reserves of the ČNB, the bank may not be able to maintain the foreign exchange interventions for a long time. "The market knows that with each such intervention, it loses part of its foreign exchange reserves, thereby gradually losing the means to improve the exchange rate of the crown," analyst Vít Hradil said.

ČNB Governor Aleš Michl said that the bank will not raise the rates any further, raising concerns in the market that it will not be able to sufficiently dampen inflation. From this point of view, the August meeting of the bank's new leadership will be pivotal.

The weakening euro raises the burning question of whether now is a good time to buy euro before going on vacation. Martin Kysela, an analyst at the Trhy.cz portal, does not expect any drastic changes in the exchange rate of the euro against the crown in the near future.

"That's why I personally don't see a reason to wait too long to buy euros for a holiday at the moment, because we will almost certainly not see a significantly better or significantly worse exchange rate in the near future," he said.

However, some economists believe it could still be worthwhile to convert some of the money now in case the European Central Bank makes another statement about a faster increase in interest rates.