NEW YORK (MarketWatch) — The euro fell to a fresh 11-year low Thursday after European Central Bank President Mario Draghi said the central bank wouldn’t buy bonds with yields lower than the central bank’s deposit rate of negative 0.2%.
The euro EURUSD, -0.72% traded as low as $ 1.1005 Thursday, its lowest level since September 2003 and it EURGBP, -0.44% also hit a multiyear low against the pound of 72.23 pence, its lowest level since December 2007.
On Wednesday evening, the shared currency had traded at 72.58 pence and $ 1.1077 to the dollar.
During his Thursday news conference in Nicosia, Cyprus, Draghi struck an upbeat tone in his initial statement, saying that the recent stream of stronger-than-expected eurozone economic data has led the ECB to revise its economic projections upward. The central bank now expects annual real GDP to increase by 1.5% in 2015, 1.9% in 2016 and 2.1% in 2017.
“The risks surrounding the economic outlook for the euro area remain on the downside but have diminished following recent monetary policy decisions and the fall in oil prices,” Draghi said.
The euro traded higher after the initial statement, hitting a session high of $ 1.1116, but its momentum was abruptly halted during the question-and-answer session, after Draghi said the central bank wouldn’t buy eurozone bonds with yields lower than its deposit rate of negative 0.2%.
Josh O’Byrne, a London-based G10 FX Strategist with Citigroup, said this means the spread between short-term and long-term eurozone bonds will compress as the ECB buys longer-duration debt, dramatically reducing the risk premium for buying longer-duration debt, and giving investors more incentive to look abroad for higher-yielding debt.
“Given that a lot of core [euro-denominated] fixed income is already trading below that [negative 0.2% yield], this means there’s going to be increasing purchases further on the curve,” O’Byrne said. “If you have some discretion, you’re not going to be [buying eurozone debt].”
Draghi didn’t mention the euro in his policy statement, a departure from recent meetings where he highlighted the impact of diverging monetary policy in Europe and abroad on exchange rates.
O’Byrne said that this means the push for a lower euro will no longer be driven by policy makers, but by investors coping with the side effects of the ECB’s stimulus measures.
“Behind the scenes, I think they would rather see [the exchange rate] stabilize, but the market is going to do what it’s going to do, and having fewer attractively-priced assets in the market is going to increase the incentive for outflows,” O’Byrne said.