Energy shocks are undermining the euro by worsening Europe's trade balance. The surge in oil prices toward $100 per barrel evokes memories of the 2022 euro crisis. Market participants currently view the euro's trading range against the dollar as likely between $1.10 and $1.12.

Earlier this year, the euro traded comfortably above $1.20 for a brief period. At that time, investors were discussing Europe's defense spending plans, major infrastructure projects, and a more confident post-pandemic recovery. This optimism dissipated almost overnight. Conflict in the Middle East has reignited one of the euro's most persistent vulnerabilities: energy dependence.

With crude oil prices surging toward $100 per barrel and natural gas prices spiking, the euro dropped to near $1.15 against the dollar within just a few days. This scenario serves as a stark reminder to traders of a harsh reality often forgotten during calm markets—the euro typically bears the brunt when energy prices rise.

Why does energy impact the euro more significantly? Energy shocks affect different economies in varying ways, and for Europe, they strike through the trade balance. The eurozone relies heavily on imports for most of its oil and natural gas consumption. When global prices surge, the region must sell more euros to buy dollars for paying these imports.

The United States, being one of the world's largest energy producers and a major exporter, experiences a different effect. Rising commodity prices boost its export revenue, even as they squeeze Europe's external accounts. This divergence quickly manifests in currency markets. Barclays estimates that every 10% increase in oil prices typically leads to a 0.5% to 1% appreciation of the dollar against major currencies. A similar rise in natural gas prices could cause the euro to decline by approximately 0.25%.

This time, events have unfolded almost according to script. Since Middle East tensions escalated, oil prices have jumped more than 15%, while Europe's benchmark gas prices briefly doubled. The euro has fallen about 2% against the dollar. For traders, the logic is straightforward: when energy becomes expensive, Europe's trade surplus shrinks—and the euro adjusts accordingly.