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Euro-dollar parity: It's now in Yellen's hands

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A fall in the euro to parity versus the dollar is now viewed by many analysts as a matter of when not if. But how quickly it happens could rest on just one person: the chair of the U.S. Federal Reserve.

The U.S. central bank meets next week and whether or not Fed chair Janet Yellen signals a rise in U.S. interest rates in the months ahead is likely to be the trigger for the next major euro sell-off, analysts say.

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"Can parity be achieved in a few weeks? At this pace yes; or is it going to be something that's achievable over a longer timeframe?," Jane Foley, senior currency strategist at Rabobank in London told CNBC Europe's "Squawk Box" Thursday.

"To be honest the person that's going to answer that question is Yellen and the FOMC statement next week," she said, referring to the Fed's rate-setting body – the Federal Open Market Committee.

Philippe Huguen | AFP | Getty Images

The euro rose for the first time in two weeks on Thursday, trading at around $1.0585, and bouncing off the previous day's 12-year lows. It has fallen fast and furious in recent weeks against a backdrop of monetary stimulus in the euro zone and expectations of monetary tightening from the Fed this year.

Fast and furious

The euro has shed 6.5 percent against the dollar in the past 30 days and even with Thursday's rebound, the currency is down more than 4 percent over the past week.

It's that fall that has raised expectations for a move to parity against the dollar, something that last happened in 2002.

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And what role does the Fed play in this parity debate? Well, say analysts, if Yellen removes the key phrase "patient" from the Fed's statement, this would be interpreted by markets as signal that a June rate hike is on the cards.

A rate rise would increase the yield differential between the dollar and the euro – pulling the single currency lower. On the other hand, if the Fed continues to express patience about the economic outlook, the dollar could give up some of its recent gains.

"If they [Fed policymakers] remove the word patience from their statement, it's [euro/dollar] going to go to parity very quickly," Kelvin Tay, managing director and regional chief investment officer, Southern APAC at UBS Wealth Management said on CNBC Asia's "Street Signs." "If you look at the momentum the U.S. dollar has going for it at the right now, it's quite scary."

Fed quandary

Analysts cite two other reasons why currencies are key to the Fed's meeting next week. First there's the volatility that the talk of higher U.S. rates is having on global markets – after all it's not just the euro that has slumped against the dollar this week – the Brazilian real, the Turkish lira and South African rand have all hit multi-year lows.

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Second, the surge in the dollar's value weakens the outlook for U.S. manufacturing and exports.

The dollar index, which measures the greenback's value against a basket of other major currencies, briefly rose to its strongest level since early 2003 above 100 on Thursday before pulling back.

"The dollar is strong against every currency –the Brazilian real, the Turkish lira , South African rand, which have really fallen off the cliff this week," Bob Parker, senior advisor for investment, strategy and research at Credit Suisse, told CNBC.

"This is why Yellen and the FOMC next week is critical and one factor in FOMC decision making is to what extent is the strong dollar hurting U.S. exports," he said.

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