A woman holds Euro banknotes in this illustration taken May 30, 2022.
A woman holds Euro banknotes in this illustration taken May 30, 2022. Reuters / DADO RUVIC

The euro fell on Tuesday almost to parity with the dollar, a threshold not crossed for two decades, weighed down by the likelihood of recession triggered by an energy crunch and an ECB rate rise campaign that lags far behind that of the Fed.

The dollar index, a measure against six counterparts, with the euro most heavily weighted, was 0.2% higher at 108.43. It had earlier climbed to 108.47, its highest since October 2002.

Dollar bullishness was showcased across currency markets, with the euro falling as low as $1.00005 on Tuesday, the weakest since December 2002. It last changed hands down 0.3% at $1.00270.

GRAPHIC:Euro parity-


The biggest pipeline carrying Russian gas to Germany, the Nord Stream 1, began annual maintenance on Monday, with flows expected to stop for 10 days. But governments and markets are worried Russia might extend the shutdown, exacerbating the energy crunch and tipping the economy into recession.

Analysts said the weak economy raises uncertainty over the European Central Bank's plan to raise interest rates, initially by 25 basis points in July, then by 50 bps in September.

"There doesn't seem to be a lot of support for euro at this point. It does not just relate to gas prices but to what seems to be a split within the ECB over how far they raise rates," said Sarah Hewin, senior economist at Standard Chartered,

"The expectation is for the (U.S. Federal Reserve) to do 75 bps this month and its aim seems to be to get to neutral (rates) as soon as possible, while with ECB, it's more of a mixed message given the backdrop over gas."

Euro weakness has been a big part of the dollar index's push higher, with the safe-haven U.S. currency also supported by worries about growth elsewhere, with China in particular implementing strict zero-COVID policies to contain fresh outbreaks.

The offshore-traded yuan approached a one-month low of 6.753 per dollar

Arguably the biggest factor in the dollar's rise, however, is the view the Fed will hike rates faster and further than peers, with Fed funds futures price rates to rise to 3.50% by March, from 1.58% currently.

Investors are keenly watching U.S. consumer price data due on Wednesday, with economists polled by Reuters expecting the index to print an 8.8% annual rate for June.

However, the dollar edged 0.33% lower to 136.94 yen, following Monday's jump to a fresh 24-year high at 137.75.

The global economy fears are undermining commodity prices and in turn commodity-focused currencies. The Australian dollar gave up 0.22% to $0.6728, and earlier matched the two-year low of $0.6716 reached on Monday.

The New Zealand dollar flatlined around $0.6117, just off two-year lows, ahead of Wednesday's central bank meeting that should deliver a half-point interest rate rise.