Some Investors See Single Currency Falling to Parity With U.S. Dollar
A day after the European Central Bank unveiled its bond-buying program, the single currency still was in free fall, blowing past analysts’ expectations for how low the euro can go.
Some investors now say the euro could fall to the point where it is on equal footing with the U.S. dollar for the first time since it climbed above the buck in late 2002.
“If you would have asked me a few months ago, I would’ve said that parity could be in the cards in the years ahead. Now, we can’t rule it out anymore even by the end of this year,” said Thomas Kressin, head of European foreign exchange at Pacific Investment Management Co., or Pimco, which has $1.68 trillion under management.
Late Friday in New York, the euro fell 1.4% against the dollar, to $1.1206, on top of a 2.1% slide the day before. It is now down 7.4% against the dollar since the turn of the year and is at its lowest point in more than 11 years.
Under the bond-buying program, known as quantitative easing, central banks create new bank reserves to buy assets from financial institutions. Central banks get bonds, and banks get money that they can in turn use to extend new credit to households and businesses. Such expansionary monetary policies usually weaken a country’s currency in part because lower interest rates make a currency less attractive to hold. In turn, a weaker currency makes exported goods more competitive overseas, which could benefit Germany’s export-driven economy.
The euro has held to a relatively lofty level in recent years, peaking at $1.60 in 2008 and trading close to $1.40 as recently as last May, in part because the ECB arrived late to the world of quantitative easing. The Federal Reserve, Bank of Japan and the Bank of England, meanwhile, have implemented stimulus efforts. The ECB’s bond-buying plan—to the tune of €60 billion ($68 billion) a month until at least September 2016—combined with record-low interest rates is meant to spur growth and stoke inflation.
AllianceBernstein LP, which manages $473 billion, added to its bearish euro currency bets one week ago in expectation of a bold move by ECB President Mario Draghi at the central bank’s meeting this past Thursday, said Scott DiMaggio, director of global fixed-income investments. The move surpassed the asset manager’s expectations.
“Capital will continue to leave the euro area,” Mr. DiMaggio said. “We think there will continue to be pressure on the euro. They haven’t even started to buy the assets yet.” For now, though, AllianceBernstein is holding its positions steady.
Full article: As Euro Slides, Strategists Cut Forecasts (Wall Street Journal)