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Euro In Sharp Decline as QE Program Depresses Sovereign Debt Yields

The euro has declined in its biggest quarterly slump against the dollar amidst efforts by the European Central Bank to buy sovereign debt, a move that has seen bond yields fall to a record low across the euro area.

Euro In Sharp Decline as QE Program Depresses Sovereign Debt Yields

This year, the euro zone currency has retreated by 12.5%, going above the 10.6% slump that was witnessed in the last quarter of the 2008 credit crunch. On March 11, the euro declined to a 12 year low as Mario Draghi, the ECB president reasserted the Bank’s commitment to increase inflation. Meanwhile the $1.2 trillion quantitative easing efforts are now on their third day.

Fabian Eliasson, head of corporate foreign exchange sales at Mizuho Financial Group New York said, ‘The asset purchase program is obviously going to drive the euro lower. The dollar is just crushing it across the board.”

On March 10, the euro declined by 1.1% down to $1.0581 against the dollar and then fell further to $1.0560, the lowest in 12 years. The shared currency fell by 0.9% to stabilize at 128.41 yen and then declined further to128.33 yen, the lowest in two years.

On the same day, euro-zone sovereign debt witnessed gains and pushed the yields to an all-time low. This followed a speech by Benoit Coeure, a euro area policy maker who said that although bonds up for purchase will be scarce, the central bank would still have enough to meet its quantitative easing goals.

According to John Hardy, the head of the foreign exchange strategy at Saxo Bank in Denmark, “QE is pushing euro yields lower and lower. Investors are selling their bonds to purchase European equities while others are getting out of the euro zone. Everyone is looking to leverage the strong dollar.”

In France, 10-year yields fell below 0.5%, with the same trends in Spain, Italy, Austria and Finland. In Germany, five-year yields fell to an all-time low at -0.125% while U.S. bonds with a five-year yield dropped 1.62%.

The European Central Bank is looking to purchase public and private debt worth 60 billion euros each month up until September 2016. Quantitative easing entails debasing currencies by multiplying the amount of cash in circulation.

Speaking from Frankfurt, Draghi said, “We can and we will apply the monetary policy in such a way that can and will bring inflation rates in line with our objectives.”

The Bank of Japan is still strongly committed to pushing down the value of the yen in an effort to attain 2% inflation by next year. Economic observers suggest that for the yen to reach this target, it needs to fall to 140 against the dollar, a figure that was last seen in 1998.

Compared to the currencies of the 10 most developed nations, the euro has dropped the most this year. Meanwhile, the dollar has performed so much better than its peers have and has gained 7.7%, and the yen 6%, making them the two best performers so far.

Market Impact

Amidst a weakening euro, the Stoxx Europe 600 SXXP is at its highest since 2007. As such, there are increasing earnings expectations among investors. But market observers say that if earnings growth, especially due to foreign exchange gains, does not take place soon, investors will sell their European export stock fast.

Market analysts expect the euro to fall to as low as $0.8225 against the dollar. Meanwhile, the Deutsche Bank has lowered its forecasts, expecting that the euro will fall to $1 by the end of the year, and fall another 90 cents by 2016 and another 85 cents by 2017.


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