Euro risks falling below parity with dollar if Iran war drags on

08:20

By: Dakir Madiha

Euro risks falling below parity with dollar if Iran war drags on

The euro has dropped to around $1.16 against the US dollar, its lowest level since late 2024, as escalating conflict involving Iran pushes investors toward safe haven assets and raises fears of stagflation across energy dependent European economies.

The currency’s decline accelerated following joint US and Israeli strikes on Iran in late February that reportedly killed Supreme Leader Ayatollah Ali Khamenei. The attacks triggered retaliation and heightened concerns that the confrontation could turn into a prolonged conflict. In the days after the strikes, the EUR/USD exchange rate fell by more than 1 percent as global capital moved into the dollar.

Economists warn that the euro could weaken significantly if the crisis disrupts energy markets. Carsten Brzeski, chief economist at a major European bank, told Euronews that an extended blockade of the Strait of Hormuz could drive oil prices above $100 per barrel. Such a surge would likely strengthen the dollar further and push the euro down toward about $1.10.

That scenario would represent a loss of roughly 5 to 8 percent against the dollar and would mark the sharpest depreciation since the energy crisis triggered by Russia’s large scale invasion of Ukraine in 2022 and 2023.

German economist Daniel Stelter outlined a more severe possibility. He said the euro could fall below the lows reached during the earlier crisis and potentially drop beneath parity with the dollar, trading between $0.90 and $0.95 if the conflict continues. Stelter warned that Germany could face a deep recession as rising energy costs reduce consumption and investment.

Analysts say Europe is particularly vulnerable because of its dependence on imported energy. Economists at Wells Fargo noted that the region is entering its seasonal period of natural gas stock rebuilding with historically low reserves. This means Europe may need to secure large volumes of energy at a time when prices could surge.

The situation creates a policy dilemma for the European Central Bank. If energy costs drive inflation higher, the bank may be unable to cut interest rates to support economic growth. At the same time, slowing economic activity could intensify the pressure on policymakers.

Stelter said sustained increases in energy prices could mathematically add about one percentage point to inflation if they persist for several months. The combination of stagnant growth and rising prices, he said, represents a classic stagflation trap.

Some forecasts are less pessimistic. US President Donald Trump told the Daily Mail that the military campaign could conclude within roughly four weeks. JPMorgan strategists expect the EUR/USD pair to remain in a range between $1.16 and $1.18 during the first half of 2026 before recovering toward $1.20 by December.

Goldman Sachs maintains a longer term projection of $1.25 for the euro if energy prices stabilize and the Federal Reserve begins cutting interest rates later in the year. However, currency strategists say the outlook remains highly uncertain as long as the geopolitical situation in the Middle East remains unresolved.