On Tuesday, the euro finally reached parity against the US dollar for the first time in over two decades, which means the two currencies were of the same value.

Euro falls

The euro declined to a value of $0.9998 against the US dollar, which is the lowest the single currency has been since December 2002. This was because the common currency continued to be under pressure due to the energy supply crisis in Europe and the gloomy economic outlook. It climbed back up by 0.8% later to trade at a value of $1.003.

The US dollar index, which measures the value of the currency against a basket of others, also climbed up at the same time to reach $108.56, which is the highest it has been since October 2002. However, it did eventually ease from that level.

Recession and energy worries

In recent weeks, there have been growing fears of a recession in Europe because of the increasing uncertainty about the energy supply of the bloc. This is because Russia has threatened to cut back on gas flows to Germany, along with the continent as a whole.

On Monday, gas delivered were temporarily halted via the Nord Stream 1 pipeline, as it began its annual maintenance. It is the single biggest piece of infrastructure for importing gas in Europe, as it carries about 55 cubic meters of gas to Germany from Russia through the Baltic Sea.

The gas supply will be suspended for 10 days and this has fueled worries that the supply may be cut permanently. This could potentially derail the preparations for the continent’s winter supply and result in a worsening gas crisis.

According to analysts, all these worries had put psychological pressure on the euro as well, bringing it down to parity against the greenback. They also added that if the common currency falls below this level, it would be a sign of burgeoning concerns of a recession in the eurozone.

ECB has a tough call

The possibility of a sharper slowdown in the economy has also given rise to the question of whether the European Central Bank (ECB) will be able to aggressively tighten its monetary policy for controlling the record-high inflation numbers. This is because an aggressive stance could actually worsen the economic crisis.

Market analysts said that this has put the ECB in an extremely difficult position. It appears that the bank has been late in terms of tightening its monetary policy and cutting back on its bond purchases. At their previous meeting, the ECB had missed a trick by not hiking the interest rates, but at that time, the medium-term inflation expectations had been closed to their target threshold.

However, since then, the changes in inflation expectations have made it apparent that the European Central Bank (ECB) needs to act right away. But, then again, they have to be careful in deciding how much to hike because it would put the euro, as well as the economy under pressure.