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Euro tumbles to parity with the dollar amid recession fears and the prospect of more US rate cuts

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The euro has fallen to parity with the dollar as fears of recession and the prospect of more aggressive interest rate rises in the United States boosted the greenback.

The single currency dropped a further 0.4 per cent as low as $1 this morning, adding to yesterday’s losses and hitting its weakest level in 20 years.

Meanwhile, the pound fell to a fresh two-year low of $1.18.

Sterling and the euro have been hit by the darkening economic outlook as inflation soars.

An intensifying energy crisis in Europe – where the biggest single pipeline carrying Russian gas to Germany began a ten-day shutdown for maintenance – has also taken its toll.

It is feared the shutdown of Nord Stream 1 may last even longer due to the war in Ukraine, hammering German households and businesses and throwing plans to fill storage for winter into disarray.

At the same time, the dollar has been pushed higher by expectations that the Federal Reserve will embark on further super-sized interest rate hikes as it steps up its battle against inflation.

Official figures tomorrow could show inflation in the US rising further above its current 41-year high of 8.6 per cent – forcing the Fed to act.

With the dollar already at a 20-year high against a basket of global currencies, analysts warned the outlook for the euro was bleak.

‘With little economic relief on the horizon for Europe, and US inflation data likely to mark a new high for the year and keep the Fed hiking aggressively, we think the risks remain skewed in favour of the greenback,’ said Jonas Goltermann at Capital Economics.

Matthew Ryan, head of market strategy at global financial services firm Ebury, also thinks the US dollar could make more gains if the energy crisis in Europe intensifies.

‘So long as we carry on seeing a divergence in gas prices across the Atlantic, investors are likely to continue favouring the dollar in the near-term, so additional moves below parity cannot be ruled out,’ he said.

‘A worst case scenario where Russia completely cuts off gas supplies to Europe could present a significant downside risk to EUR/USD’.