LONDON (Dispatches) -- The euro sank to its weakest since late 2002 versus the dollar on Tuesday, as a jump in natural gas prices reignited worries about the euro zone economy and data showed business growth in the region slowed sharply in June.
After the U.S. markets were closed for a holiday on Monday, Tuesday was proving to be a much more volatile session, with stocks reversing early gains and euro zone bond yields falling as investors sought out safety in government debt.
News that Norwegian offshore workers began a strike on Tuesday that will reduce oil and gas output has added to fears about a European energy shortage.
The euro dropped by as much as 1.3% against the dollar to $1.0281, its weakest since December 2002. Versus the Swiss franc, it dropped 0.9 %to 0.9925 francs, its lowest since 2015.
“Everyone is gearing up for Nord Stream to be turned off and Russia has already signaled they will use that as a weapon. So this is really hitting the competitiveness of German manufacturing,” said Jordan Rochester, a currencies analyst at Nomura.
“Germany has way higher manufacturing, so we are facing a supply crunch of energy, rationing, so the euro area’s competitiveness will collapse and its exports will be curtailed.”
Russia’s former president Dmitry Medvedev said on Tuesday a reported proposal from Japan to cap the price of Russian oil at around half its current level would lead to significantly less oil on the market and could push prices above $300-$400 a barrel.
Commenting on the proposal, which was reportedly put forward by Prime Minister Fumio Kishida, Medvedev said Japan “would have neither oil nor gas from Russia, as well as no participation in the Sakhalin-2 LNG project” as a result.
President Vladimir Putin last week signed a decree that seizes full control of the Sakhalin-2 gas and oil project in Russia’s far east, a move that could force out Shell as well as Japanese companies Mitsui & Co and Mitsubishi Corp.
Survey data on Tuesday showed business growth across the euro zone slowed further last month and forward-looking indicators suggested the region could slip into decline this quarter as the cost of living crisis keeps consumers wary.
“Markets are all about recession risk,” said Grace Peters from JPMorgan Private Bank, pointing to evidence that consumers had changed their behavior since June.
Meanwhile, the Bank of England warned that the economic prospects for Britain and the world had darkened since the start of the year and told banks to ramp up capital buffers to ensure they could weather the storm.
International institutions, such as the International Monetary Fund and OECD say Britain is more susceptible to recession and persistently high inflation than other Western economies, which are all grappling with global energy and commodity market shocks.
“The global economic outlook has deteriorated markedly. Global financial conditions as a whole have tightened significantly,” Bank of England Governor Andrew Bailey told a news conference after the BoE published its half-yearly Financial Stability Report (FSR).