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Draghi Wins Soros’s Kudos as Euro Drop Accelerates

As the euro plunged in 2012 amid a raging debt crisis, Mario Draghi pledged to do “whatever it takes” to bolster confidence in the exchange rate and save the European Union. Now, he’s implementing policies that would debase the currency, this time to rescue the region’s economy.

By committing more money for government-bond purchases than forecasters anticipated, the European Central Bank president sent the euro tumbling to an 11-year low of $ 1.1115 today, while the cost of options protecting against further losses increased. The 1.1-trillion-euro ($ 1.25 trillion) program announced by the ECB prompted strategists at HSBC Holdings Plc and UBS AG to cut outlooks for the 19-nation currency.

“It’s pretty overwhelming,” billionaire investor George Soros, 84, said at an event Thursday in Davos, Switzerland. The “powerful” set of measures exceeded expectations, he said, and “I think it will be effective.”

While policy makers insist they don’t target the exchange rate, a weaker euro is key to their goal of staving off deflation and making their near-stagnant economy more competitive. Soros, the former hedge-fund manager, is best known for successfully betting against the Bank of England in 1992.

Spreading Risk

By buying bonds from investors, the ECB hopes to free up cash to circulate in the economy, which also has the effect of debasing the euro. It pledged to buy 60 billion euros of bonds every month through September next year, Draghi said in a press conference after the ECB met in Frankfurt. To assuage critics, the region’s 19 national central banks will make 80 percent of the purchases and take on any risk they carry.

Today, ECB Executive Board member Benoit Coeure said the quantitative-easing program could be expanded or extended if the impact on inflation isn’t judged enough.

“Once again, you can’t count against Draghi,” Peter Dragicevich, a strategist at Commonwealth Bank of Australia in London, said by phone Thursday. “You’ve got to give the guy 10 out of 10. He just continues to over-deliver relative to the market’s already high expectations.”

Draghi’s announcement continued a remarkable few days for the currency, which already weakened a record amount versus a basket of its peers after Switzerland unexpectedly ended its currency cap on Jan. 15.

Traders are paying more than 2 percentage points more for options giving them the right to sell the euro versus the dollar than for contracts to buy similar options, three month risk-reversal rates compiled by Bloomberg show. That’s up from about 0.72 percentage points near the end of October, suggesting traders expect market volatility will rise as the euro falls.

Priced In

Draghi said in July 2012 he would do “whatever it takes” to save the euro as the currency plummeted while borrowing costs surged in the region and threatened to lead to a breakup of the union. He unveiled an unlimited bond-purchase program almost two months later.

Since QE was well-flagged, there was always the chance that the euro wouldn’t fall on the announcement, and that any weakness had already been factored into its price before Draghi sat down to speak. By the end of the European business day on Wednesday, the currency was already 4 percent lower against the dollar this year in anticipation of the bond purchases, after slumping 12 percent the previous six months.

Exceeding Expectations

“The ECB delivered on size and flexibility, exceeding the market’s expectations — thus the sharp drop in the euro,” Mark McCormick, a foreign-exchange strategist at Credit Agricole SA in New York, said in an e-mail. “It’s clearly a negative for the euro.”

While the size of the ECB’s plan was the same as one cited by euro-zone central-bank officials yesterday, buying was accelerated by 10 billion euros a month for completion three months sooner.

“Draghi did achieve what he wanted to — shock the market, surprise the market — and he did,” Paresh Upadhyaya, the Boston-based director of currency strategy and portfolio manager at Pioneer Investment Management Inc., said by phone. The euro region’s growth outlook and its fight against deflation may help to push the currency to parity or lower than the greenback as early as this year, said Upadhyaya, who helps to manage about $ 248 billion.

The euro’s plunge is outpacing forecasts predicting it will reach $ 1.15 by year-end, according to the median estimate of 93 analysts surveyed by Bloomberg News. UBS’s wealth-management arm revised its three-month forecast for the euro to $ 1.10 from $ 1.15 after the ECB plan was announced, while HSBC cut its year-end prediction to $ 1.09 from $ 1.15. The currency was at $ 1.1277 at 12:05 p.m. in New York.

Parity ‘Dream’

The slide may cheer Italian Prime Minister Matteo Renzi, who said “my dream is parity” with the dollar, in an interview with the Wall Street Journal Wednesday. The currencies last traded one for one in 2002.

A minority of strategists are predicting the euro will fall to parity as stimulus accelerates. ING Groep NV, ABN Amro Bank NV, Goldman Sachs Group Inc., Citigroup Inc. and Brown Brothers Harriman & Co. are the only banks in a Bloomberg survey that agree the exchange rate will fall that low by the end of 2016. Nomura Holdings Inc. said the euro may achieve parity as soon as the first half of this year.

“Draghi proved once again that he can do the right thing – – and even when people expect him to do the right thing, he still over-delivers,” said Alessio de Longis, a macro strategist in New York at OppenheimerFunds Inc., which has $ 237 billion under management. “Parity is definitely a possibility.”

To contact the reporter on this story: Lananh Nguyen in New York at [email protected]

To contact the editors responsible for this story: Dave Liedtka at [email protected] Kenneth Pringle

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