Gas crisis fears hammer euro, boost dollar and Swiss franc

LONDON, July 26 (Reuters) – The prospect of another Russian gas supply cut sent the euro tumbling on Tuesday, as dollar gains were tempered by growing uncertainty over the tightening trajectory of the policy of the US Federal Reserve after the hike in interest rates expected this week.

European Union countries were set to approve an emergency proposal to curb gas demand, the prospect of which sent the single currency and German bond yields plummeting and hit German stocks more .

“It is becoming increasingly common that the price to pay for supporting Ukraine against Russia will be gas rationing,” said Lyn Graham-Taylor, senior strategist at Rabobank.

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“All of this adds to the story of recession and inflation.”

Russia announced on Monday that it would reduce gas flows to Germany through the Nord Stream 1 gas pipeline to 33 million cubic meters per day (bpd) from Wednesday. This is half the current flow, which is already only 40% of normal capacity. Read more[[[[

As of 10:45 GMT, the euro was down 0.7% at $1.0142 and against the pound it was down 0.3% at 84.6 pence. It also lost 0.8% against the Swiss franc, plunging to a new seven-year low around 0.977 francs.

The euro remains above parity against the dollar, hit earlier this month, but ING Bank strategist Francesco Pesole has warned traders may start to reassess the Bank’s rate hike expectations Central European.

Money markets are now seeing an ECB rate hike of 39 basis points in September, up from 50 basis points last week and around 100 basis points by the end of the year, which, according to Pesole, is too warmongering.

“The Russian gas story is the risk of the black swan, a constant threat,” he said.

“Even if the flow of gas is not completely stopped and there is no talk of rationing, a lot of damage has already been done to the European economy.”

Citi analysts agreed, noting that Monday’s grim IFO trade survey in Germany “was most likely driven by simple uncertainty about the future of Russian gas supplies.”

The latest supply cut will “at the very least keep this uncertainty high,” they added.

The dollar, meanwhile, rose 0.6% to 107.08, a four-day high against an off-currency basket, although it remains more than 2% below 20-year highs of 109.29. achieved less than two weeks ago.

The US Federal Reserve begins a two-day meeting later today and will almost certainly propose a 75 basis point rate hike. But traders are weighing whether weaker growth could see it signal a slower pace of rate hikes ahead.

Fed key rate futures show rates peaked in January 2023, a month earlier than the February reading they gave last week, while long-term Treasury yields fell around 80 basis points from the mid-June highs.

Pesole said traders had trimmed excessively “long” positions in the greenback as they repriced US terminal rates.

However, most analysts still retain a bullish view on the dollar, with fears of a global economic slowdown bolstered by soft data prints and Monday’s earnings warning from U.S. retailer Walmart (WMT.N).

“There is less scope for dovish repricing at the Fed than at the ECB…Fed prices are more or less in line with the dot plot and inflation/growth outlook,” Pesole added. , referring to the chart recording every Fed official. interest rate forecast.

Elsewhere, commodity prices had taken the Australian dollar to a one-month high of $0.6984 before dollar strength pulled it back to $0.6943.

Wednesday’s inflation data could show consumer prices (AUCPIY=ECI) rising 6.2% year-on-year, the fastest in more than three decades, which analysts at ANZ Bank said could fuel some rise in the Aussie.

“A 50 basis point hike from the (Reserve Bank of Australia) next week is anything but a foregone conclusion – the main risk is a bigger hike,” they added.

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Reporting by Sujata Rao and Dhara Ranasinghe: additional reporting by Tom Westbrook in Singapore, editing by Susan Fenton and Ed Osmond

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