Euro sinks to 11-year lows on firmer USD and ECB QE
The euro currency met with levels it hasn’t seen since 2003 on Wednesday as market participants geared up for Thursday’s European Central Bank meeting which is expected to outline the latest bond-buying programme.
By late afternoon in Europe, the euro was trading 0.8% lower against the US dollar at $1.1088, breaking below its 11-year low of $1.1098 that it reached in September 2003.
Against the British pound, the euro was off by 0.3% to change hands at 0.72515.
The Eurozone’s currency is under increasing pressure on a combined driving force of the ECB launching its quantitative easing and the sustained strength of the US dollar on the back of improving US economic growth.
At the same time, the dollar is further supported by the increasing prospects of monetary policy tightening by the Federal Reserve within the next 12 months. The dollar index, which tracks the greenback against trading partners' currencies, has gained 0.4% to a reading of 1,179, on track for its highest close in a decade.
FX strategist Geoffrey Yu at UBS said the euro is now clearly the worst-positioned currency. “The marginal improvement in the dollar's performance also points to a renewal of the positive relationship between risk and the greenback,” added Yu.
QE by the ECB will see the central bank buy €60bn of bonds per month to increase the supply of new money into the financial system in order to induce more liquidity. The latest measures are a fresh bid to create inflation and feed growth into the real economy.
Jameel Ahmad, market analyst at FXTM noted that there are two major issues that have led to the ECB to finally launch the long-talked about QE program; stagnant economic growth and deflation risks. “These risks alongside the ECB easing policy to combat them were the major factors behind the EUR/USD dropping from 1.39 to 1.10 in nine months,” said Ahmad.
Outside of FX markets, fixed income assets are on the move ahead of the ECB’s meeting as traders pile into European government bonds on hopes they can sell them to the central bank at a higher rate.
That’s led to the suppression of bond yields across the Eurozone, particularly the peripheral nations with Portugal, Ireland and Italy all seeing their borrowing costs reaching fresh record lows.
The eye-watering low borrowing costs have reportedly won the attention of iconic billionaire investor Warrant Buffett who is looking to take advantage of the prices.
According to the FT, Warren Buffett's Berkshire Hathaway business, which is not known for borrowing in European bond markets, has hired banks including Deutsche Bank, Goldman Sachs and BofA Merrill Lynch for a potential eurobond offering. The FT cites to someone with direct knowledge of the deal.
As European bond prices escalate, there’s a growing trend of US companies looking to take advantage of huge demand for euro-denominated bonds ahead of the ECB’s stimulus programme. The FT report cites Apple, for example, selling €2.8bn of eurobonds in November.