The euro is grappling with mounting challenges, with resurgent oil prices and renewed worries about Italy’s fiscal situation intensifying headwinds, potentially pushing the currency closer to the psychologically significant $1 mark.

This year, trading near its lowest levels at approximately $1.05, the euro witnessed a 3% drop against the dollar in the third quarter, and it is on track for its third consecutive year of losses.

While a strong dollar due to the robust U.S. economy and increased capital influx into the country has contributed to this decline, euro-specific factors, such as vulnerability to escalating oil prices and an already struggling economy, are becoming more pronounced.

The euro is particularly susceptible to oil price spikes, as over 90% of oil products in the European Union are net imports.

Nomura’s G10 FX strategist Jordan Rochester mentioned, “High oil prices are weighing on the euro area’s terms of trade, and if oil prices move above $100 per barrel to $110 per barrel, we think it will be difficult for the euro to avoid parity.”

Oil prices surged nearly 30% in the last quarter alone, nearing $98 last week, fueled by OPEC and its allies tightening crude supply.

Barclays and other central banks anticipate oil prices reaching $100 shortly. Nomura predicts the euro may weaken to $1.02 by year-end, indicating a further 3% fall from current levels.

Morgan Stanley’s chief Europe economist, Jens Eisenschmidt, emphasized that the euro area faces higher exposure to energy shocks and geopolitical risks than the United States, impacting the euro’s competitiveness and long-term prospects.

A weaker euro can boost exporters’ competitiveness and elevate price pressures due to higher import costs, compounding the effects of soaring oil prices.

This may prompt the European Central Bank (ECB) to pay closer attention, though their concern is currently measured.

Concerns about Italy add another layer of apprehension, with the yield premium on Italian debt compared to Germany reaching a significant threshold.

If the Italian bond market deteriorates substantially and the ECB doesn’t react swiftly, the euro’s downside risks could extend to the $1.00/$1.02 range, according to ING currency strategist Francesco Pesole.

While euro weakness may be mitigated if the U.S. economy slows alongside inflation, potentially dampening the strong dollar, uncertainties remain, and the risk of the euro approaching parity against the dollar persists if a weakened U.S. economy doesn’t adequately offset inflation concerns.