Gas crisis sends euro back below parity against dollar

By Dhara Ranasinghe and Joice Alves

LONDON (Reuters) - The euro briefly fell back below parity against a robust dollar on Monday and was languishing at five-week lows, weighed down by concern that a three-day halt to European gas supplies later this month will exacerbate an energy crisis.

China's yuan dropped to its lowest in nearly two years after the central bank cut key lending rates.

The dollar index, which measures the greenback against a basket of peers, surged to a mid-July high as Federal Reserve officials reiterated an aggressive monetary tightening stance ahead of the Fed's Jackson Hole symposium this week.

The euro and sterling bore the brunt of the selling pressure against the dollar after Russia announced late on Friday a three-day halt to European gas supplies via the Nord Stream 1 pipeline at the end of this month.

The single currency was last down 0.4% at $1.0001 after briefly falling to its lowest level since mid-July of $0.99895.

Jane Foley, head of FX strategy at Rabobank in London, said she would not be surprised to see the euro falling to $0.95.

"European gas prices pushed higher again this morning, which draws attention to the recessionary risks facing the euro zone this winter and potentially beyond," she said.

Chris Turner, global head of markets at ING, said: "The euro's fair value has been damaged by the energy shock - meaning that euro/dollar is not especially cheap even at these levels."

Bundesbank President Joachim Nagel told German newspaper Rheinischen Post that the German economy, among the most exposed to disruptions in Russian gas supply, is "likely" to suffer a recession over the winter if the energy crisis continues to deepen.

Sterling meanwhile fell to a new five-week low of $1.17875 as the energy crisis highlighted Britain's cost-of-living crisis. [GBP/]

The U.S. dollar index, which measures the currency against six rivals, rose 0.25% to 108.42 after touching its highest since July 15.

It gained 2.33% last week - its biggest weekly rally since April 2020 - amid a chorus of Fed policymakers stressing that more needs to be done to rein in decades-high inflation.

The latest was Richmond Fed President Thomas Barkin on Friday, saying the "urge" among central bankers was towards faster, front-loaded rate increases.

Money markets currently indicate 54.5% odds for another supersized 75 basis-point rate hike at the Fed's next meeting on Sept. 21

Economists in a Reuters poll lean toward a 50 basis-point increase, with recession risks on the rise.

Benchmark 10-year U.S. Treasury yields briefly rose above 3% on Monday for the first time since July 21.

As yields came off their highs, the dollar edged down against the yen and was a touch lower on the day at 136.81. Earlier, the dollar reached its strongest levels against the yen since July 27.

The dollar also rose as high as 6.8436 yuan in onshore trading for the first time since September 2020, after the People's Bank of China cut the one and five-year loan prime rates, as widely expected.

That came after it eased other key borrowing benchmarks in a surprise move last week.

Against the offshore yuan, the dollar hit 6.8645, also the strongest since September 2020.