The euro fell, bringing to a halt a two weeklong rally against the greenback. This decline comes as funding concerns in Greece continue to mount and as the European Central Bank proceeds with its rigorous quantitative easing, which differs substantially with the push for interest rate hikes in the U.S.
Euro Declines Amidst Goldman Sach’s Bearish Calls
The euro area currency fell against all 14 out of 16 major currencies amidst the ECB’s aggressive plans to purchase 1.1 trillion euros or an equivalent of $1.2 trillion worth of bonds. The rigorous efforts to purchase bonds through to September 2016 is an attempt to reduce deflation and support the relatively weak economies in the euro zone.
This year, there has been mounting speculation on the euro’s decline as the currency continues on a record nine-month fall amidst Greek efforts to garner support from creditors for more financial aid to the country.
According to Kengo Suzuki, the senior currency strategist at Mizuho Securities in Tokyo, “The rebound of the euro is only a reflection of the adjustments as the currency continues to be pressured by the imminent uncertainty over Greek debt and the ECB’s aggressive easing stunt.”
Suzuki added that the euro is likely to fall toward $1.05.
On March 30, the euro fell by 0.2% down to $1.0871 in Tokyo after a two weeklong gain that ended March 27. The currency traded lower than 50-, 100- and 200-day moving averages and at 129.64 yen, the change was negligible.
Speculators including Goldman Sachs made net bearish calls on the euro which saw the currency rebound to an unprecedented high in the week starting March 24.
On March 27, Goldman Sachs indicated in a research note that, “We continue to anticipate that the EUR will continue to weaken against the USD in the quarters ahead, because of the cyclical strength of the US economy and the portfolio-rebalancing outflow in the euro zone as driven by quantitative easing initiatives.”
Effect of divergent policies
Goldman further added, “As the Fed continues to overlook forward guidance, the ECB is moving in the opposite direction.”
Earlier this month, the Fed put a dump on anticipations that interest rates would rise by mid-year. This had the effect of causing the dollar to decline in its largest fall since 2011. As a result, traders are now focused on how other banks globally are easing their monetary policies while the U.S. continues to tighten its policy.
While ECB president Mario Draghi was optimistic about the positive effects of the quantitative easing initiative in its first month of implementation, Janet Yellen, the Fed Chair reiterated that interest rates would rise this year.
According to Sam Tuck a currency strategist, “The USD is in a bull market that is cyclical. Markets tend to agree that the first interest rate hikes would happen in the period between June and September.”
This year, equities in Europe have witnessed record highs but they have experienced unprecedented pressure this week, seeing a decline in the euro. Even then, a weaker Euro has been advantageous to exporters in the euro area who can export cheaply at the global level.
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