The US dollar is trading at its strongest level against the euro in 20 years as recession fears push the pair closer to parity

• The US Dollar Index reached its highest level since December 2002 on Tuesday.
• The climb of more than 1% came largely on the back of a drop in the euro.

A key gauge of the US dollar kicked up to two-decade highs Tuesday, largely fueled by the euro's slump as investors see economic conditions weakening in Europe, with a German data point highlighting slowdown concerns.

The US Dollar Index rose as much as 1.4% to 106.64, crossing above the 106 level for the first time since December 2002. The index was hurt as the euro fell by 1.7% against the greenback, buying $1.0245.

The EUR/USD pair fell below the 1.03 handle for the first time in nearly two decades. The euro has a heavy weighting on the US Dollar Index, of about 58%.

"It is not a secret that the Eurozone economy is not doing great, with the outlook also looking bleaker by the day," Fawad Razaqzada, market analyst at Forex.com, wrote in a Tuesday note. "The weakness is driven by rampant inflation, concerns over energy and rising borrowing costs. We have seen consumer, business and investor sentiment all take big hits, with PMIs also falling. Ongoing tensions between Europe and Russia over natural gas supplies means business sentiment in Germany, in particular, is unlikely to improve any time soon."

The euro was hit as European natural gas prices shot up to four-month highs, with investors considering an ongoing strike among oil and gas workers in Norway, the largest producer of oil and gas in Western Europe. Meanwhile, Germany on Tuesday approved legislation that will let the government bailout energy companies strained by the reduced supply of gas from Russia.

"The situation on the gas market is tense and unfortunately we cannot rule out a deterioration in the situation," Germany's Economy Minister Robert Habeck said in a statement, according to Reuters.

Surging energy prices and supply chain issues led Germany, Europe's largest economy, on Monday to report its first trade deficit since 1991. Monthly exports fell by 0.5% in May from April while imports into the country rose 2.7%.

"Slowdowns fears are now arguably the main driver of currencies globally, perhaps even more so than central bank interest rate expectations, which have somewhat taken a backseat in the past few days," Matthew Ryan, head of market strategy at Ebury, a global financial services firm, said in a note Tuesday. "For the most part, economic indicator data out of the major areas has taken a turn for the worse of late, as the increase in consumer prices weighs on both business and consumer sentiment."

Citigroup's Economic Surprise Index last week dropped to its lowest level since June 2020 "in a clear sign of the aforementioned deterioration," said Ryan.

The US Dollar Index has climbed about 11% so far in 2022 in large part as the Federal Reserve has pushed interest rates higher to combat decades-high inflation. The Federal Open Market Committee is widely expected to raise rates again at its two-day meeting ending July 27. The Fed last month delivered a rate hike of 75 basis points, the largest increase since 1994. Investors on Wednesday will receive minutes from last month's Fed meeting.

"Whether the greenback is able to hold onto these gains is likely to be dependent on two things," said Ryan. "The pace of interest rate hikes from the Federal Reserve during the remainder of the year," and the "extent to which global recessions fears are materialised."

Dollar strength helps makes imports into the US cheaper to purchase and money stretch further in Europe for American travelers. But dollar strength can also cut into revenue for US-based companies selling products overseas.

The Dollar Index also gauges the greenback's performance against the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc.