Why is the Euro Dropping Now?
PUBLISHED ON: Oct 24, 2015
Why is the Euro Dropping Now?
The Greek crisis is off of the front pages, but the value of the Euro is lower than it has been in months. So why is the currency dropping now, of all times? And just how low will it go? The answers could surprise you.
On Friday, the Euro continued its recent downward trend vs. the dollar. This all comes on the back of an announcement by the European Central Bank that there is further quantitative easing on the horizon for the Eurozone.
If you haven’t been following along, quantitative easing is the process where the central bank issues new currency electronically, and then uses that currency to buy up outstanding bonds.
The policy is still controversial in some sectors of finance, but in general it’s regarded as the best of a bunch of bad plans to return stability to Europe.
Though quantitative easing reduces the amount of outstanding debt for the Eurozone, it’s also an extremely inflationary move for the Euro. That’s a big part of why the Euro fell on Friday, flirting with numbers that haven’t been seen since summer. In fact, the drop was the largest in real terms since May.
Inflation is a real concern for Europe and the Eurozone in particular. The Euro is the backbone of multiple large economies, not just a few scattered regional ones. Introducing inflation may help countries saddled with debt like Greece, but it works against powerhouse economies like Germany.
As to where the Euro could end up, that’s anyone’s guess at this point. Although some analysts are predicting parity with the dollar by December. If the two currencies achieve parity, it will mark the lowest value of the Euro to date, and could seriously shake economies across Europe.
Assuming the European Central Bank continues its policy of quantitative easing into 2016 -- which most assume it will -- there could be a perfect storm brewing that will cause the value of the Euro to plummet and reach parity with the dollar by the end of the year.
Believe it or not, the Fed has a role to play in all of this as well. According to Richard Yetsenda, the head of global markets research at Australia & New Zealand Banking Group (ANZ), the Fed is a key component of this “perfect storm.”
"(Parity) is totally possible and it may (happen). In fact, one of the things that has kept the euro elevated is that there's been this structural euro short in the market, and whenever you've had an escalation of Fed tightening expectations you've also had an escalation in risk aversion, and they've tended to work in opposite directions on the euro," Yetsenda told reporters on Friday.
"But if the Fed can hike and the ECB's also doing some easing... then that would be a more bearish scenario for the euro and we could potentially see a break from this $1.05 - $1.15 range we've been in for quite a while."
All of that means that a move toward parity is much more likely, which again could be devastating for economies across Europe. It’s yet to be seen whether or not the Fed will act this year to raise rates, but all indications are on the table that it will. Coupled with massive quantitative easing in Europe -- to the tune of over $11 million new Euros printed -- we could be gearing up for the days when the US dollar is more valuable than the Euro.