Euro Falls to Over Seven-Month Low

The euro extended its recent decline, falling below $1.15 to its weakest level since late July, as the US dollar gained broadly amid escalating tensions in the Middle East. With no signs of de-escalation, the common currency faced additional strain from oil prices climbing above $100 per barrel, highlighting Europe’s persistent vulnerability: rising energy costs weigh on the trade balance and dampen the euro. The surge in energy prices has prompted money markets to price in two European Central Bank rate hikes this year, a sharp reversal from last month, when no moves were expected. Focus is turning to the ECB’s upcoming policy meeting, where President Christine Lagarde is expected to signal how the bank plans to shield the eurozone from inflationary pressures stemming from the conflict. Earlier this week, she emphasized that the ECB would act to prevent a repeat of the inflation shocks seen after Russia’s invasion of Ukraine.

The euro extended its decline toward $1.15, reaching its weakest level since November 24, as persistent uncertainty surrounding the Middle East conflict strengthened the US dollar and heightened concerns about rising inflation in the eurozone. Oil prices resumed their rally, briefly climbing above $100 per barrel after Iran intensified attacks on oil and transportation infrastructure across the region. Meanwhile, the International Energy Agency’s announcement of a 400-million-barrel release from strategic oil reserves provided little immediate relief to markets, as it may take weeks or even months for the supply to reach buyers. Money markets are now fully pricing in a European Central Bank interest rate hike by July, with an 85% probability of a second increase by December. This marks a sharp shift in expectations from late February, before the outbreak of the Iran war, when traders had assigned roughly a 40% chance that the ECB would cut rates before the end of the year.

The euro gave up early gains to drop below the $1.16 mark, hitting its weakest level since late November, as lingering uncertainty over the Middle East conflict and concerns about rising inflation across the eurozone weighed on the currency. Oil prices remained under $90 per barrel after the International Energy Agency proposed a record release of strategic oil reserves to help ease the sharp rise in energy costs triggered by the Iran conflict. On the monetary policy front, expectations have shifted toward a more hawkish stance for the European Central Bank. Markets are increasingly pricing in at least one 25-basis-point rate hike this year, with some traders now considering the possibility of two increases. On Tuesday, Christine Lagarde reiterated that the ECB is committed to taking all necessary measures to keep inflation under control, despite the current surge in energy prices.