As 'economic warfare' threatens to break out in Europe, the euro finally crumbles to $1 for the first time since 2002

The euro hit $1 for the first time in 20 years on Tuesday, after Russia's decision to shut off a major natural gas line threatened to wreak havoc across the region.

The euro has lost around 12% of its value against the dollar so far this year because of expectations for the Federal Reserve to raise US rates more quickly than the European Central Bank will raise eurozone rates.

Russia is closing theNord Stream 1 natural gas line for 10 days this month for maintenance. European governments are worried that Moscow will not reopen the refinery, which could lead to a surge in energy prices.

This scenario will cause massive gas shortages in the region, prompting authorities to implement fuel rationing and, in the worst case, order brief shutdowns of factories to reduce energy consumption heading into the winter season, paving the way for a deep recession.

The threat of economic warfare will be on every trader's mind and will depress the euro in the coming days until market participants have a better idea of what Russia plans to do next.

The final catalyst arrived on Tuesday when an index of German businesses showed confidence hitting a 10-year low in July.

The experts assess the current economic situation more negatively than in the previous month and have further lowered their already unfavorable forecast for the next six months.

After hitting a session low of $1.0000, the euro recovered to $1.0022, but was still down on the day. In December 2002 it went below $1.

Europe depends on Russia for 40% of its natural gas needs. Russia was piping gas at 40% capacity through theNord Stream 1 in response to Western sanctions.

With regional natural gas prices now showing a 380% increase compared with last year and little prospect of shoring up inventories ahead of the winter, EU governments are scrambling to find alternative sources of fuel.

The eurozone's wholesale inflation rate is 36.3%, largely due to energy prices, while the US's is just 10.8%. The Fed has raised rates to 1.75% from 0.25-0.50% at the beginning of the year and more large hikes are in the works, but the European Central Bank has not yet raised interest rates.

Analysts said that a surge in natural gas prices could keep the euro below $1 for some time.

"I fear that once this dam is broken, the euro could settle below that level for the time being, until we know at the end of next week whether the gas is flowing again," said Antje Praefcke in a note.

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