Euro coins
Despite notching up new lows against the dollar, the euro has fared better against many other leading currencies © Simon Dawson/Bloomberg

A global rally in the dollar is ripping through markets as investors bet most central banks will lag behind the pace of rate rises from the US Federal Reserve.

The DXY dollar index, measuring broad dollar strength against a basket of other currencies, has pushed up to its highest point since 2017, leaving a dent in sterling and in a number of emerging markets. Small further gains would take the dollar to its strongest point in two decades.

The euro sank to its weakest point since April 2017 on Wednesday at $1.0524, according to Refinitiv data, with investors wagering the European Central Bank will be cautious in removing stimulus as the war in Ukraine casts a shadow over the bloc’s economic recovery.

“The market is convinced that the Fed will be more aggressive than the ECB under pretty much any scenario,” said Athanasios Vamvakidis, head of foreign exchange strategy at Bank of America. “I think we are seeing a long overdue capitulation from investors who had been reluctant to go short [the euro against the dollar].”

The euro has declined steadily since early February as traders responded to increasingly hawkish signals from the US Federal Reserve, which is expected to raise interest rates rapidly as it fights soaring inflation in an economy that is largely insulated from the fallout of war in Ukraine.

While markets have begun to price in an end to ultra-loose monetary policy in the eurozone, the ECB is expected to tread carefully, given the threat to the region’s economy from soaring energy prices that could worsen if the bloc decides to impose sanctions on Russian oil and gas exports.

Wednesday’s losses for the euro come after Russia suspended gas supplies to Poland and Bulgaria, triggering a sharp rise in European gas prices.

Line chart of $ per € showing Europe's single currency has tumbled to its weakest level since 2017

The euro has fared better against many other leading currencies. It is up against the Japanese yen, the British pound and the Swedish krona in 2022. But the dollar has also rallied in a rush to safety among investors in light of the resurgence of coronavirus in China.

“It’s maybe early to talk about [euro] parity [with the dollar],” said Vamvakidis. “But if we think about what else could go wrong for the euro, then I think with sanctions on Russian energy we could indeed get there.”

Gazprom’s halt to Polish and Bulgarian gas supplies, which came after Russia said the two countries had failed to make payments for the gas in roubles, also hit eastern European currencies. The Polish zloty has lost more than 2 per cent against the dollar in the past two days, although it remains above the level it fell to in early March, shortly after Russia’s invasion of Ukraine. The Hungarian forint and Czech koruna have also declined.

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