Euro nears parity with the dollar, analysts uncertain over its future
The euro continued to plunge on Wednesday, losing 1.17% against the dollar as the European currency traded below $1.06 for the first time in 12 years.
On Monday, the European Central Bank (ECB) started buying government bonds, debt instruments issued by European Union institutions and private debt securities in a bid to boost inflation and growth in the Eurozone.
However, the introduction of the €1.1trn (£780bn) programme has seen yields on the debt of nearly all its member countries near record lows, even as investors shifted out of the currency.
A third of the losses accumulated by the euro have come since Friday, when a better-than-expected US jobs report fuelled speculation that the Federal Reserve could hike interest rates sooner than originally expected by markets.
Rising expectations for US interest rates and an escalation of the Greek crisis could push the euro down to parity against the US dollar, but some analysts expect it to recover at least partially in 2016.
In a note on Tuesday, analysts at Capital Economics said the current decline of the euro had simply restored the previous relationship between the currency and the dollar, after a period in which the former was stronger "than would normally be implied by movements in expected interest rates".
With the Federal Reserve seemingly poised to hike interest rates over the next few months, while the ECB seems intent to remain on hold for a longer period, the euro is not likely to come under any pressure from diverging policies in interest rates, the think-tank added.
Furthermore, the latest drop in the single currency appears to have gone against the most recent movement in expectations of economic growth, with the growth gap narrowing slightly in 2015 as the Eurozone economy has staged a timid recovery. With the gap expected to decrease even further in 2016, analysts believe this might suggest that the euro will recover naturally over the next 12 months.
However, Capital Economics warned that there factors pointing at a possibly even sharper decline of the European currency.
"There is a clear danger that markets raise their expectations for US interest rates further as and when the Fed actually pulls the trigger," they said.
"Euro to hit cycle low of 0.85"
"Indeed, the Fed may even intend to raise expectations somewhat in order to push longer-term rates higher."
Solid economic conditions in the US couple with sluggish growth in the Eurozone could also weighed on the latter's performance in 2016, which would have a negative impact on any hopes of recovery for the euro.
"We don’t believe that the euro has fallen far enough to ensure the growth in the peripheral countries that is required to address their debt problems," Capital Economics added.
Deutsche Bank even more bearish
On Tuesday Deutsche Bank's FX team, led by Jim Reid, forecast the single currency was a entering a period of sustained weakness.
The broker saw euro/dollar reaching parity with the greenback at the end of this year, 0.90 next year and a cycle low of 0.85 in 2017.
They posited that the euro area's large current account surplus constitutes a pool of excess savings which will be channeled overseas and will have a major impact on financial asset prices worldwide for the rest of the decade.