Euro falls to two-decade lows as energy crisis bites

© Reuters. FILE PHOTO: U.S. Dollar and Euro banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Dhara Ranasinghe

LONDON (Reuters) - The euro fell to a fresh two-decade low on Tuesday, dealt a fresh blow by renewed concern that an energy shock will keep inflation elevated and makes a recession in Europe all but certain.

China's yuan meanwhile weakened to a two-year low and sterling briefly touched its weakest since March 2020.

Business activity data from Europe was not as bad as feared, pushing the euro off the 20-year low hit early in the session, at $0.99005.

Still, euro zone business activity contracted for a second straight month in August and a bleak outlook kept the euro down.

At 1116 GMT, the currency was down 0.15% at $0.9926 and holding below the key $1-level.

"The renewed concerns about Europe following the spike in gas prices is the main reason why the euro is down," said Holger Schmieding, chief economist at Berenberg.

(Graphic: Euro trashed, https://fingfx.thomsonreuters.com/gfx/mkt/mypmnerqqvr/Pasted%20image%201661248285941.png)

British and Dutch wholesale gas prices rose sharply on Monday as the prospect of maintenance on the main Russian pipeline to Europe put markets on edge.

Russia will halt natural gas supplies to Europe via the Nord Stream 1 pipeline for three days at the end of the month, the latest reminder of the precarious state of the continent's energy supply.

Heat waves on the continent have already put a strain on energy supply and worries are growing that any disruption during the winter months could be devastating for business activity.

That's all hurt the euro, which is down more than 12% so far this year, and has shed almost 3% in August.

"What we're trying to figure out is how much of the move in the euro is driven by thin summer liquidity and how much is driven by flows," said Kenneth Broux, a currency strategist at Societe Generale (OTC:SCGLY) in London.

"But of course the increase in gas prices yesterday is bad news all around."

Sterling recovered some ground after the PMI data but was not too far off a 2-1/2 year low hit earlier at $1.1718 .

The Japanese yen was little changed around 137.42 per dollar after touching a one-month low of 137.705 earlier.

The risk-sensitive Aussie fell to a one-month low before recovering to around $0.6888.

China's yuan fell to an almost two-year low of 6.8666 per dollar as Beijing's steps to easy policies to revive faltering growth and the Federal Reserve's relentless tightening streak kept pressure on the Chinese currency.

Against a basket of currencies, in which the euro is the most heavily weighted, the U.S. dollar index was firmer at 109.06, having touched its highest since mid-July.

Another reason investors have sought shelter in dollars is the growing risk of a hawkish message from the Fed's Jackson Hole symposium, flagged by several officials last week.

"I think he (Fed chief Jerome Powell) will be hawkish on Friday, it's too soon to declare an inflation victory," said Broux at Societe Generale.