Euro and US dollar are at parity for the first time in 20 years

For the first time in 2 decades, the exchange rate between the euro (EUU) and the US dollar has reached parity -- meaning the two currencies are worth the same.

The euro hit $1 on Tuesday, down about 12% since the start of the year, as the war on Europe's eastern edge has triggered an energy crisis that has hurt the continent's growth outlook. It last bought $1.0030.

On Wednesday, the euro hovered a whisker above parity on the dollar ahead of US inflation data with traders wary a sky-high reading could force it to lows not seen in decades, Reuters reported.

Economists forecast headline US inflation accelerated to 8.8% year-on-year in June, a 40-year high, which is likely to reinforce expectations of interest rate hikes in response and help the dollar in a market nervous about both rates and growth.

"I think the US dollar will keep increasing if the US CPI is stronger than expected," said Commonwealth Bank of Australia strategist Joe Capurso in Sydney. "There's definitely a very good chance that the euro falls below parity tonight."

The euro already fell beneath parity on the Swiss franc last month and is flirting with a drop beneath its 200-day moving average against the pound.

Weakness in the euro and yen has vaulted the US dollar index higher and it made a two-decade peak of 108.560 this week, hovering at 108.220 in early trade on Wednesday.

The energy crisis comes alongside an economic slowdown, which has cast doubts over whether the European Central Bank can adequately tighten policy to bring down inflation.

The ECB announced that it will hike interest rates this month for the first time since 2011, as the eurozone inflation rate sits at 8.6%, CNN reports.

But some say the ECB is far behind the curve, and that a hard landing is all but inevitable. Germany recorded its first trade deficit in goods since 1991 last week as fuel prices and general supply chain chaos significantly increased the price of imports.

"Given the nature of Germany's exports which are commodity-price sensitive, it remains hard to imagine that the trade balance could improve significantly from here in the next few months given the expected slowdown in the eurozone economy," Saxo Bank foreign exchange strategists wrote in a recent note.

A series of aggressive interest rate hikes by central banks, including the Fed, coupled with slowing economic growth will keep pressure on the euro while sending investors toward the US dollar as a safe haven, say analysts.

The US Federal Reserve is well ahead of Europe on tightening, having hiked interest rates by 75 basis points while indicating that more rate increases will come this month.

This safe haven retreat into the US dollar could become even more extreme if Europe and the US enter a recession, warned Deutsche Global Head of FX Research George Saravelos in a note last week.

Euro bounces from brink of parity with US dollar

A situation where the euro is trading below the US dollar at a range of $0.95 to $0.97 could "well be reached," wrote Saravelos, "if both Europe and the US find themselves slip-sliding into a (deeper) recession in Q3 while the Fed is still hiking rates."

Meanwhile, the Japanese yen has taken a beating this year as the Bank of Japan sticks with its ultra-easy monetary policy in contrast with tightening nearly everywhere else.

It was under pressure at 136.95 per dollar on Wednesday after hitting its lowest since 1998 on Monday at 137.75.

The Australian dollar fell 0.2% to $0.6746, just above a two-year trough of $0.6712 made on Tuesday.

Sterling has also slipped on the stronger dollar and analysts see it adrift in the wake of the resignation of British Prime Minister Boris Johnson last week.

It last bought $1.1877, with gross domestic product data due at 0600 GMT the next hurdle, as traders expect May brought zero growth.

"The combination of slow growth, debt and high inflation are likely to prove very tricky for the new Tory leadership," said Rabobank senior strategist Jane Foley.

"Although sterling investors will be hoping for a government less distracted by scandal and more focused on providing coherence around the post-Brexit economy, the jury is still out.

"Sterling may suffer a lack of fresh direction until the new PM is in place."

The South Korean won was a fraction firmer in morning trade after the central bank raised interest rates by 50 basis points, in line with market expectations. 

In Wellington, where the New Zealand central bank has been in the habit of surprising markets, investors are fairly sure a hike is coming and are focused on the tone of the statement.

"Our dovish scenario comprises a 50bp hike, and a statement which emphasises the downside risks to the global economy," said Westpac analyst Imre Speizer, something which he expects could knock the kiwi half a cent lower and push down near-term rates.