Posted on March 11, 2015 by the XM Investment Research Desk at 2:45 pm GMT
The euro has been under intense pressure since the beginning of the year – particularly against the US dollar, against which it has dropped nearly 13% – a huge drop in a period of almost three months.
The euro’s recent drop has been quite historic as it marks a more than 12-year low at 1.0559. It is therefore useful to briefly look at the price history single currency since its inception in January of 1999. Shortly after the birth of the euro and amidst some worries about the viability of the whole project, it fell to its life low of 0.8225.
However, monetary policy accommodation in the United States following the 2000 stock market crash and a perception that the European Central Bank was a successor to the Bundesbank in terms of monetary orthodoxy and inflation-fighting, led the euro to the high of 1.6038 in July of 2008, two months before the bankruptcy of Lehman Brothers and the onset of the severe global financial crisis of 2008/ 2009.
The Eurozone debt crisis, with a number of European economies entering IMF-style adjustment programs did cause selloffs in the euro such as the one in the summer of 2012 when the 1.20 level was tested. Under the leadership of Mario Draghi, who took office in November of 2011, the ECB has been more active in trying to support European economic growth. The promise of doing “whatever it takes” to ensure the survival of the euro, the promise of the OMT (Outright Monetary Transactions) program that has not been implemented yet, zero interest rates and negative deposit rates as well as the latest Quantitative Easing program of 1.1 trillion euros, have taken a severe toll on the euro. The interest rate reductions and the QE program ultimately drove the euro from nearly 1.40 against the dollar in May of 2014 to its present level of 1.05.
It is also worth noting that in terms of inflation differentials of the Eurozone versus the US, the euro should have appreciated around 7% versus the greenback from its level of 1.0086 at the end of 1999 – that is around 1.0792. Of course a different starting point will give very different estimates, but it is also worth pointing out that the average value of euro / dollar since 2000 has been at 1.2459.
To sum up, the euro’s decline has been particularly steep during the past 9 months. The current argument of monetary policy divergence between the Eurozone (which has just started its QE program) and the United States (which has finished its QE program and is looking to raise interest rates), is providing traders with a ready excuse to short the euro. Many are calling for parity or even lower for the world’s most widely traded exchange rate and developments – and the repercussions of this move – will be closely watched