(Bloomberg). – What was impossible months ago is becoming a real risk. The euro might fall to parity with US dollars this year.

That’s what strategists are warning as the Russian invasion of Ukraine threatens to derail the European economic recovery from the pandemic and delay even further the European Central Bank’s glacial progress toward policy normalization.

The currency has fallen 3.7% against the US dollar in the first stages of the Ukraine conflict. It fell to $1.1010 last Friday. As Russia’s sanctions continue to wreak havoc on the economies of Europe, traders have been selling the currency.

“Right now the euro is the most liquid short available for investors,” said Stephen Miller, an investment consultant at GSFM, a unit of Canada’s CI Financial Corp. in Sydney. “The consequences of this conflict are going to last for a long, long time and it’s not unimaginable that we see euro test parity with the dollar over a 12-to-18-month horizon.” 

The probability that the euro will drop below parity with the greenback this year has climbed to 9.6%, according to Bloomberg’s FX Rate Forecast Model. This compares to the odds of 2.4% one month ago when many observers saw the possibility of war in Ukraine as unrealistic.

The common currency took another leg lower Friday after Ukrainian officials said Russian troops had shelled Europe’s largest nuclear power plant, located in the eastern part of their country. The currency fell to just $1.10 below the level at which it was last seen in May 2020.

Adding to the euro’s downdraft is the difference between the dovish ECB and hawkish Federal Reserve, which is set to commence a cycle of raising interest rates at its March meeting.

“The war in Ukraine and the divergent monetary policy path between the EU and the Fed are seriously undermining the euro,” said Qi Gao, a currency strategist at Scotiabank in Singapore. “If this war drags on, there is a serious risk the euro will approach parity against the dollar.”

Traders focus currently on $1.10 — in order to gauge how long the support level holds and avoid further drops.

“The longevity in this conflict will be a challenge for broader Europe and the weakness of the euro tends to be a natural play linked to this,” said George Boubouras, head of research at hedge fund K2 Asset Management in Melbourne. “I continue to see more pressure on the euro from here.”