Plunging Euro May Help Draghi More Than Week-Old QE Program

(Bloomberg) — He may be reluctant to admit it, but the biggest benefits from Mario Draghi’s bond purchases are likely to come from the plunge in the euro.

The European Central Bank’s quantitative-easing program will boost euro-region inflation by 0.3 percentage point this year, with a weaker exchange rate doing most of the work, according to economists surveyed by Bloomberg. The euro tumbled to a 12-year low as the purchases, which increase the money supply, entered their second week.

“That’s the transmission mechanism that might be the most powerful,” Hans Joerg-Naumer, head of capital-markets analysis at Allianz Global Investors GmbH, which oversees $ 412 billion, said by phone from Frankfurt on March 11. “They want to keep the euro exchange-rate low.”

More from Germany Weighs Heta Fallout as Lone Star Bank Rescued

ECB President Draghi is counting on his 1.1 trillion-euro ($ 1.16 trillion) QE plan to rescue an economy that’s barely out of a recession and where consumer prices have been falling for three months. While he acknowledges the economic benefits a weaker euro can bring, Draghi has consistently denied targeting the exchange rate, which smacks of unfair advantage among the global policy community.

Economic Impact

In addition to stoking inflation, a weaker currency makes exports more competitive. While the other main effect of QE — tumbling bond yields from Germany to Spain — may help governments’ borrowing costs, it’s less likely to have a direct impact on growth.

More from Sound Global May Miss Deadline to File 2014 Annual Report

“The euro weakening is probably the strongest case for a better economy in Europe,” said Poul Kobberup, chief investment officer at PFA Pension A/S in Copenhagen, which oversees about $ 60 billion. “It’s been weakening quite dramatically.”

The euro slid as low as $ 1.0458 on Monday, the weakest since January 2003, and has plunged 13 percent this year, putting it on track for its biggest ever quarterly decline. The euro zone’s reliance on exports — overseas shipments account for almost half of the 19-nation region’s gross domestic product — makes that slide particularly helpful.

More from The Entire Global Economy in Two Big Slides

Europe’s shared currency has been falling for months as Draghi prepared markets for his bond purchases and the dollar rallied on the Federal Reserve’s plans to raise interest rates as soon as this year. The average rate on euro-area sovereign debt has also shrunk, declining to 0.424 percent on March 11, the lowest since at least 1995, Bank of America Merrill Lynch indexes show.

Predicting Parity

Goldman Sachs Group Inc. cut its forecast March 13 on the euro, predicting it will fall about 3 percent to $ 1.02 in three months and reach parity in six months. The median of 34 responses to Bloomberg’s economist survey also calls for euro-dollar parity, with many respondents saying the decline will benefit the economy.

“As the recovery gains steam, there should be a notable upward tick in headline and core inflation, supported by the depreciation of the euro,” Christopher Matthies, an economist at Sparkasse Suedholstein in Neumuenster, Germany, wrote in his response to Bloomberg’s QE survey, conducted March 6-12. The currency decline “is mainly caused by the upcoming tightening of the Fed and the QE program of the ECB,” he wrote.

Driving Growth

A 10 percent slide in the euro against its major peers adds 0.3 percentage point to GDP, according to an estimate by ING DiBa AG, and the shared currency is already down 9.6 percent in the past three months versus a basket of its Group of 10 counterparts.

Even so, Draghi has a ways to go before he translates these losses into tangible economic benefits. Euro-zone GDP grew just 0.9 percent last year, while consumer prices dropped 0.3 percent in February from the same month in 2014.

Not everyone thinks he’ll be successful, either. Peter Dixon, an economist at Commerzbank AG, said the cheaper euro may struggle to boost growth given the weakest peripheral economies aren’t big exporters and global demand remains poor.

“It’s not much point having a weaker currency if demand isn’t that dynamic,” Dixon said by phone from London. “Demand matters.”

Questions are being asked as to whether the euro is falling too fast. QE risks “overshooting,” and the “exchange-rate decline is larger than we had expected,” Bank of Italy Governor Ignazio Visco said over the weekend. He also said the bond-buying program reduces economic uncertainty.

Improving Outlook

The ECB is becoming more optimistic about the economy and boosted its outlook for 2015 growth to 1.5 percent this month, from a previous estimate of 1 percent.

Options trading should give policy makers confidence that further euro losses are in store, too.

The premium for three-month options to sell the euro over contracts allowing for purchases widened to a 2 1/2-year high of 2.6 percentage points in February and was at 2.04 percentage points as of 9:26 a.m. London time on Monday, data compiled by Bloomberg show. That shows traders are betting additional declines are more likely than a rally.

QE programs ‘‘definitely drive the currency down,’’ said Ben Pace, the New York-based chief investment officer at HPM Partners LLC, which oversees $ 5.5 billion. ‘‘Market participants think it’s going to help exports and eventually help the economy.’’

(An earlier version of this story was corrected to fix the spelling of Copenhagen.)

To contact the reporters on this story: David Goodman in London at [email protected]; Andre Tartar in London at [email protected]

To contact the editors responsible for this story: Paul Dobson at [email protected] Paul Armstrong, Caroline Salas Gage

More from

  • Putin’s Successful Dismantling of Ukraine’s Economy
  • Swiss Count Cost of Franc Tsunami as Market Tide Recedes
  • Asian Energy Stocks Slide Before Fed Meets; China Mobile Gains

Hedge funds benefit as euro falls

The euro’s plunge has given a much-needed lift to hedge funds that have been repeatedly frustrated by the world’s central banks.

A bevy of multibillion-dollar funds has gained as much as 9% this year as their managers bet against the euro, riding the European Central Bank’s push to weaken the currency and bolster Europe’s economy.

It has been “manna from heaven,” said one hedge-fund manager, who made money last year shorting the euro, or betting the currency would lose value. He has steadily reduced his position and taken profits this year as the euro has continued to fall.

Bets against the euro helped Bridgewater Associates LP, the world’s biggest hedge-fund firm, earn 7% in its Pure Alpha fund in the first two months of 2015, its strongest start in years, a person familiar with the firm said.

Some of the biggest winners have been the so-called macro funds that bet on broad economic developments, such as shifts in monetary policy, including Caxton Associates LP, Moore Capital Management LP and Tudor Investment Corp. Other funds not known for making big macro calls, such as the D.E. Shaw Group, also have profited from the currency’s decline against the dollar.

It has been a difficult few years for macro managers and trend followers, who rely on complex automatic-trading strategies to profit and who have bemoaned that the markets are unusually calm and difficult to trade.

Many managers also misread broad changes and misplayed trades. One misfire: Investors widely bet that interest rates would rise last year, only to find U.S. bond prices were surprisingly resilient, pushing yields lower.

The euro wager has tested fund managers’ patience. Some of them have been betting against the currency for as long as two years, though traders said more investors piled in or increased their wagers starting last summer, when the ECB said it would push a key interest rate into negative territory.

Bets against the euro have mounted rapidly in recent months. In the aggregate, investors have boosted their bearish euro bets in the futures market by 19% since the start of the year, according to data from the U.S. Commodity Futures Trading Commission that runs through March 10. While futures trading accounts for a small fraction of the foreign-exchange market, it is widely seen as a good proxy for how investors are positioned.

As of March 10, investors held a net 181,073 bearish bets, according to the CFTC. That compares with 152,219 at the end of 2014. Investors as a group were bullish on the euro as recently as May.

The ECB kicked off a vast bond-buying program last week, pushing the euro to a 12-year low against the dollar and boosting profits that began to trickle in at the end of last year. The euro ended Friday at $ 1.0497, down 13% since the end of 2014.

“It’s very, very common for macro managers to be short the euro against the dollar,” said Nicolas Rousselet, head of hedge funds at Swiss-based investment firm Unigestion. “It’s a huge driver of macro fund returns.”

The wager, in some ways, is more a bet on the dollar, with investors drawn to the prospect of higher interest rates in the U.S. as other central banks ease policies. Many funds that are betting against the euro also are shorting other currencies against the dollar, such as the Korean won and the Japanese yen.

But the euro bet is “probably the largest position for most macro managers at the moment,” according to Tim Schuler, investment strategist at Permal Group, which oversees $ 22 billion in assets.

“You have all these divergent monetary policies where you have tightening in a few countries and easing in others, and that’s creating a lot of potential for macro managers where that didn’t exist after the crisis,” said Greg Dowling of Cincinnati-based Fund Evaluation Group, which invests clients’ money in hedge funds and has had exposure to the trade through several managers.

Some investors warn that betting on a strong dollar and weaker euro has become so popular that a surprise, such as the Fed deciding not to raise interest rates soon, could quickly lead to losses.

Kiwi hits high against euro, more to come

The New Zealand dollar has reached its highest level ever against the euro in what may be the first of more peaks as the euro falls foul of the European Central Bank’s bond-buying programme.

The kiwi hit a record 70 euro cents on Monday morning, and was trading at 69.96c at 5pm on Monday in Wellington from 69.47 cents at 5pm on Friday. The local currency rose to US73.64 cents from US73.39c at the New York close on Friday.

Sam Tuck, senior FX strategist at ANZ New Zealand, says the kiwi may dip on this week’s GlobalDairyTrade dairy auction as he’s picking prices will be weak but there will be a reminder of the strength of the New Zealand economy when fourth quarter gross domestic product figures are released on Thursday.

The report is expected to show the New Zealand’s economy expanded at a 0.7 per cent pace in the fourth quarter, for an annual average growth rate of 3.2 per cent, according to a Reuters poll.

The US dollar is at its highest level in 12 years amid speculation the Federal Reserve Open Market Committee will drop the word “patient” from its policy statement at 7am Thursday New Zealand time, suggesting the Fed is getting close to lifting its benchmark interest rate which has been near zero since 2008.

That leaves the euro out of favour for as the European Central Bank buys 60 billion euros worth of bonds per month it pushes bond yields lower and investors look offshore for returns, weakening the euro.

“This morning we got above 70.00 euro cents and our expectation is the euro will continue to decline over 2015. Our forecasts expect kiwi-euro to get to 73 to 74 by the end of the year,” Mr Tuck said.

On Monday, the New Zealand dollar gained to 96.23 Australian cents from A95.99c on Friday.

The local currency was at 49.86 British pence from 49.58 pence on Friday and 89.29 yen from 89.58 yen.

The trade-weighted index rose to 77.95 from 77.87.

FOREX-Dollar rally stalls, euro climbs from fresh 12-year low

(Adds BOE’s Carney, fresh prices)

* Euro rises 0.7 pct after hitting 12-year low vs dollar

* U.S. retail sales disappoint, compound dollar weakness

* Kiwi up more than 1.6 pct versus U.S. dollar

By Daniel Bases

NEW YORK, March 12 (Reuters) – The dollar fell against the euro on Thursday as investors took profits after a powerful rally brought the greenback to a 12-year high in early trade, then surprisingly weak U.S. February retail sales stoked the sell-off.

The euro remained down 12 percent year-to-date, careening toward parity with the dollar as monetary policies ease in Europe and elsewhere at a time of stronger U.S. economic growth and expectations the Federal Reserve will start raising interest rates this year.

The dollar weakened after the U.S. Commerce Department reported a surprising 0.6 percent drop in retail sales in February as harsh winter weather dented sales that were expected to rise 0.3 percent.

“I think we’re finally seeing some early signs of fatigue in the dollar’s rally,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, D.C.

“Caution is on the rise ahead of next week’s Fed meeting. On the one hand, steady job growth has many expecting the Fed to lay the ground work for an eventual rate hike. But this rapid rise in the dollar could warrant a warning from the Fed as a potential threat to growth,” he said.

The euro rose 0.71 percent to $ 1.06220 on the EBS trading platform, recovering from a session low of $ 1.0494, its weakest since January 2003.

The European Central Bank launched a 1.1 trillion euro bond-buying program this week, denting the euro’s appeal by driving yields of many euro zone bonds to all-time lows.

A 10-year German bond yields 0.25 percent versus 2.10 percent on a benchmark 10-year U.S. Treasury.

The euro rose 0.60 percent to 128.86 yen while the dollar fell 0.10 percent to 121.335 yen.

“Unless we get protests from other trading partners about a weakening euro, I think the trend will continue. There have been some noises from the U.S. but as long as the Europeans are happy with the currency weakness, the euro can go down further,” said Yujiro Goto, currency analyst at Nomura.

Sterling fell 0.50 percent to a 20-month low of $ 1.4850 . Bank of England Governor Mark Carney signaled he was in no rush to raise interest rates, disappointing some who expected a rate hike in early 2016.

New Zealand’s dollar gained 1.3 percent against the U.S. dollar after the Reserve Bank of New Zealand sounded less dovish than markets had expected and kept rates steady at 3.5 percent.

(Additional reporting by Jemima Kelly, Anirban Nag and Ahmed Aboulenein in London; Reporting By Daniel Bases; Editing by Meredith Mazzilli and David Gregorio)

Dollar-euro parity: What a one-to-one exchange means

As the euro’s value sinks, the dollar-euro parity could affect your plans: whether you are investing in foreign markets or just planning a spring vacation in the south of France.

The strong greenback against plunging euro prices means there could soon be a one-to-one exchange rate between the currencies. And the magical state of parity is a significant marker not only because it eliminates the cost of exchanging money-but also because it is a rare occurrence.

The last parity moment was in November 2002. Parity also occurred when the euro was introduced in 1999, and in 2000. So why now? The two currencies getting cozy signifies an ongoing trend in changing money supplies and disparate central bank policies between the United States and the European Union.

Read More $ 40 million says the euro will keep cratering

Because the United States and euro zone have floating exchange rates, the price of money is set by the market, not a government: supply (from the central bank) and demand for the currency.

Demand fluctuates based on factors including the expected inflation or deflation of the currency over time, the perception of a country as a stable place to hold valuable assets, the level of currency reserves needed for purchases, and interest rates.

The euro is getting weaker because we know the supply will go up. The European Central Bank has started an aggressive economic stimulus in the form of quantitative easing -in which it is buying bonds off the public-private markets in exchange for cash. Those purchases will flood the market with euros.

In fact, that’s the goal. Like the United States did, the European Union hopes to keep money cheap and accessible to its residents to spur economic growth.

But by the law of supply and demand, when there is more to go around, each euro is worth less. A glut of euros is particularly important because currency is seen as a store of value. Like we count on investments to create a return, we count on cash to buy as much as it did yesterday, minus a tiny but predictable amount of inflation each year.

Because the euro is becoming less valuable and has less purchasing power abroad, it’s not seen as a valuable way to hold assets, meaning that people may dump euro-denominated assets for an asset with more return.

As a result, the dollar is being seen as a more stable alternative to the euro and has relatively more purchasing power abroad. Compounding the situation, while rates of return in Europe spiral downward, the Federal Reserve is planning to raise interest rates and reduce the money supply-meaning that dollar-denominated assets will become more valuable.

American businesses that operate in Europe could feel the strain of dollar-euro parity because it means that it is relatively more expensive to buy their products. It also means that when U.S. companies bring their earnings back across the Atlantic, they dilute their euro-denominated earnings, which are now worth less than they used to be.

Even earlier in 2015, as the dollar strengthened and the euro weakened, multinational corporations like Procter & Gamble (NYSE: PG) and Caterpillar (NYSE: CAT) blamed the strong dollar for disappointing earnings.

While a rising dollar hurts U.S. businesses selling exports, it helps consumers looking for European imports.

If you’re throwing around the idea of buying a villa in Tuscany, now’s your chance. When the cost of exchanging money is eliminated, it will make any purchase in Europe relatively cheaper. Prices of goods can’t readjust right away to keep up with foreign demand. Those Haribo bears are priced for the locals, which mean you can get a steal.

Read More It’s time for that European vacation

No one knows for sure, but it’s likely that the moment of parity-the golden one-to-one ratio-will be brief. The overall currency trend of a beefy dollar and weak euro, however, may be more long term.

With Greece and Germany squabbling over the sluggish economy and a Fed decision to raise rates looming, the forces that are driving a wedge between the demand for euros and dollars may carry on for a while.

More From CNBC

  • News Page
  • Blogs Page
  • Earnings Central

Euro: Watch Out Below, Says Deutsche Bank

The decline and fall of the euro’s exchange rate against the dollar is moving at an eyebrow-raising rate.

It’s at $ 1.0750… no, $ 1.0725… no, just under $ 1.07. You get the idea.

Predicting a decline to one-to-one for the exchange rate is becoming an increasingly popular sport.

Deutsche Bank, whose thoughts are worth a mention since it’s the second biggest bank in FX trading, has been in the bearish camp for a while. Now it’s even deeper in bear territory, predicting the rate will drop to $ 0.85 two years from now.

The bank revised lower its forecasts on the euro against the dollar Tuesday, taking the view that European investors will shift their assets towards foreign markets, and in particular the U.S., the U.K. and Canada.

Strategists George Saravelos and Robin Winkler expect the euro to fall towards parity by the end of 2015 from a previous forecast of  1.05. From there, the euro will keep plummeting to 0.90 by 2016 and 0.85 in 2017.

That’s one of the most bearish calls so far on the euro.

Pushed down by the combined effect of the ECB bond-buying program and the prospect of an interest rate rise in the U.S., the euro has lost about 12% since the start of the year agains the dollar. That’s a big move for a major currency. It’s worth pointing out that it’s lost less against a trade-weighted basket of other currencies, which you can read all about here.

For Deutsche Bank, capital flows are key. Local investors will grow tired of the tiny returns available in the region’s pricey bond market, and look elsewhere, the bank reckons.

Capital outflows will be of about €4 trillion ($ 4.3 billion).  Assuming net financial outflows of €150 billion a quarter, this process will take the rest of the decade, it says. “The primary destination of European outflows will be core fixed income markets in the rest of the world, and evidence over the last few months supports these trends,” they say.

Foreign buyers of European bonds are not expected to make up the gap.

“We are seeing large outflows from European fixed income,” said Adrian Owens, a currency funds manager at GAM last week. “Why buy Bunds at 35 basis points? Why buy euro debt from Coca-Cola at these yields? Central bank reserve managers are also moving out of the euro.”

Market Extra: The euro just smashed through a 12-year-old barrier


NEW YORK (MarketWatch) — When the euro smashed through $ 1.10 this week, it flattened the last big, round technical barrier with any kind of precedent in the last 12 years.

Now, analysts are trying to divine what the next stop will be in the shared currency’s inexorable march toward dollar parity.

Matthew Weller, senior technical analyst at, said the market could see some short-term consolidation around the September 2003 low of $ 1.0765.

Weller said he doesn’t expect parity until “some time in 2016,” and that the euro could experience the kind of halting, sideways trade seen for most of February as we draw closer to a Federal Reserve rate hike.

The next big risk event for the euro is the Federal Reserve’s two-day policy meeting on March 17. Weller said that the removal of language that the Fed can be “patient” before deciding to raise rates from its monetary policy statement would signal to the market that the central bank intends to soon raise rates for the first time since 2006 in June.

Jens Nordvig, global head of currency strategy at Nomura, said his official estimate for the euro’s year-end value is $ 1.05 — but there is a chance the market could see parity in the next three to six months, he said, if eurozone fixed-income outflows continue to intensify.

As eurozone bond yields have fallen to record lows, outflows from eurozone credit markets have hit an all-time high, Nordvig said.

In the medium-term, Nordvig expects that there could be a brief period of consolidation around the $ 1.05 level after the Fed raises rates.

Boris Schlossberg, managing director of FX strategy for BK Asset Management, said the conflict between Greek and European leaders over how to resolve Greece’s debt crisis is a major threat to the euro’s valuation.

“The euro is suffering from the market’s realization that there is no political will whatsoever to resolve the Greek issue in a pragmatic way,” Schlossberg said, citing several eurozone officials who have said they expect Greece to repay every cent of its debt. “That is just not realistic.”

Schlossberg said he expects the euro to find some short-term support around $ 1.06.

The euro won’t see much of an impact from the beginning of the eurozone’s expanded stimulus program on Monday, analysts said, as the market has largely priced it in already.

With so many variables at play, the range of when the euro could hit parity — and how far it could fall — is difficult to gauge.

“Specifically how far we can go down — that’s a very difficult question. But it’s very unlikely we’ve seen the end of it [the euro’s decline],” Nordvig said.

As euro hits 12-year low, parity with dollar looms

LONDON (AP) — The euro could soon be doing something it’s only done a couple of times in its 16-year existence — trading 1-to-1 with the dollar.

Europe’s single currency has since May been on a downward trajectory against the dollar, mainly because of the divergence in economic performance between the eurozone and the United States. Where the eurozone’s recovery from the global financial crisis has been at best anemic, the U.S. economy appears to be going from strength to strength.

And that divergence is hurting the euro’s fortunes.

From $ 1.40 last spring, it is now trading below $ 1.10 for the first time in 12 years and market observers think parity with the dollar could be imminent. On currency exchanges along the Champs-Elysees in Paris, it’s not far off, with one euro buying $ 1.039.

“We expect the euro will depreciate below parity in coming months,” said Tomas Holinka, economist at Moody’s Analytics.

Beyond the symbolic value that two of the world’s biggest reserve currencies are worth the same, the euro’s decline is helping exporters in the 19 eurozone states and will make it less expensive for U.S. tourists to visit.

“The cheap euro makes Greece more attractive, and we have a very positive picture from the U.S.,” said Andreas Andreadis, head of the Association of Greek Tourist Enterprises.

The currency movements are mainly driven by the actions of each economy’s central banks. While the European Central Bank has slashed interest rates and launched a massive money-creating stimulus, effectively diluting the value of the euro, the U.S. Federal Reserve is doing the opposite — it’s preparing to raise interest rates following its decision last year to bring an end to its own multi-year stimulus.

Friday’s U.S. payrolls figures highlighted that divergence. The forecast-busting 295,000 increase in jobs in February ratcheted up expectations that the Fed would start raising interest rates as soon as June. That prompted a flurry of dollar buying, with the euro sliding 1.6 percent to $ 1.0858.

Since its launch in 1999 at a rate of just shy of $ 1.18, the euro has spent most of its time above current levels.

In its early days, the euro was relatively friendless, and in late 2000, the European Central Bank and other central banks intervened in the markets to prop up the ailing currency, which at one stage fell to a low of a little over $ 0.82.

That appeared to help and the euro staged a rebound, pushing back above parity with the dollar in late 2002. By the summer of 2008, just before the global financial crisis took a particularly damaging turn with the collapse of U.S. investment bank Lehman Brothers, it struck its all-time high just above $ 1.60.

Since last year, however, it has been on the slide again. Confirmation on Thursday from ECB President Mario Draghi that the bank is pushing ahead with its 1 trillion-euro ($ 1.1 trillion) stimulus program pushed the euro to its lowest in 12 years.

For the region’s exporters, who just a few months ago, were bemoaning the euro’s relative strength, that’s positive. Recent economic indicators have suggested that the euro’s decline, combined with the fall in oil prices, is helping business.

But economists cautioned against overstating the impact, particularly for the weaker, peripheral economies like Greece.

“Whether a weaker euro will help exports is debatable when for most of the periphery, trade is with other eurozone economies,” said Neil MacKinnon, global macro strategist at VTB Capital.


Jamey Keaten in Paris contributed to this report.

Draghi Outflanking Kuroda as Bearish Euro Bets Surge

(Bloomberg) — With Mario Draghi poised to start injecting unprecedented amounts of money into the euro-zone economy, he’s already beating his Japanese peer in the global currency wars.

Bets on a weaker euro by hedge funds and other large speculators last month exceeded bearish yen wagers by the most since August 2012, data from the Commodity Futures Trading Commission show. Options suggest the shared currency is headed toward a 1 1/2-year low versus the yen, which would help the European Central Bank president achieve his ambitions of boosting growth and inflation.

While March heralds the start of Draghi’s 60 billion euros ($ 67 billion) of monthly bond purchases, traders are speculating the Bank of Japan is done with expanding the pace of its own quantitative easing. Anticipation of European QE has driven yields on about $ 1.9 trillion of euro-region bonds below zero, encouraging investors to quit the 19-nation currency.

More from The Politics of Aging

“The euro will win the race to the bottom,” Ian Stannard, the Europe head of currency strategy at Morgan Stanley in London, said by phone Feb. 25. While the promise of QE “puts the euro under pressure,” there’s “less emphasis on the BOJ to provide further stimulus,” he said.

Gains Reversed

The euro tumbled 7.3 percent against its Japanese counterpart in 2015, unwinding some of the 45 percent advance during the previous three years. After dropping to 130.15 yen on Jan. 26, the weakest level since September 2013, it was at 134.26 as of 9:13 a.m. in London.

More from Deepwater Gets Financing for First U.S. Offshore Wind Farm

While Draghi and BOJ Governor Haruhiko Kuroda insist they don’t target exchange rates, they’ve acknowledged the benefits weaker currencies can bring, from faster inflation to more competitive exports. Looser monetary policies worldwide are leading strategists to talk about a revival of the “currency wars,” a term coined by Brazil Finance Minister Guido Mantega to describe the competitive devaluations of 2010.

It’s clear who options traders think is winning the Europe-versus-Japan bout.

The premium for three-month contracts giving the right to sell the euro versus the yen, over those allowing for purchases, widened to 2.75 percentage points on Feb. 23, data compiled by Bloomberg show. That’s the most since July 2012, when Draghi made his pledge to do “whatever it takes” to save the euro.

More from Dollar Rises to Decade High as Economic Gains Stoke Rate Outlook

Further Losses

Sentiment has soured on the euro as the ECB pumped money into the economy, driving yields down so that investors are effectively paying euro-region governments to hold their cash. German five-year bond yields plunged to a record minus 0.11 percent last week, compared with positive 0.08 percent for equivalent Japanese securities on Monday.

Chris Turner, the head of currency strategy at ING Groep NV, the most accurate overall forecaster in last year’s Bloomberg foreign-exchange rankings, dismissed the idea that Draghi’s QE is already factored into the euro.

“Though some in the markets say it’s priced, and the currency doesn’t need to fall,” the experience of QE programs in Japan and the U.K. tell us differently, Turner said by phone from London on Feb. 26. QE tends to be “quite contemporaneous” in its impact on currencies, he said.

ING sees the euro falling about 10 percent by year-end to reach parity with the dollar for the first time since 2002, and predicts the yen will weaken about 8 percent versus the U.S. currency.

Euro Shorts

The euro has slumped more than 7 percent against the greenback this year, touching an 11-year low of $ 1.1098 on Jan. 26. For the past month, it’s held about there, surprising bears with its resilience as euro-region leaders wrangled over Greece and reached a provisional deal over extending the nation’s bailout.

The yen has been little changed versus the dollar since December, when it slumped to its weakest level since 2007.

Investors have roughly halved their net-short positions in the yen versus the dollar this year to 47,512 contracts, according to the latest data from the CFTC in Washington. Bets the euro will weaken increased by about 20 percent to 177,736.

Not everyone’s so sure the euro can keep falling against the yen. The ECB’s QE plan “should be in the price,” and Japan can still surprise markets by “beefing up” its own stimulus, said Daragh Maher, a strategist at HSBC Holdings Plc in London.

Boosting Inflation

Kuroda said in February he sees no immediate need to add to the 80 trillion yen ($ 667 billion) a year of sovereign bonds the BOJ’s already buying. He did signal he’s ready to adjust policy if necessary to reach his goal of boosting inflation to 2 percent. Core inflation was 0.2 percent in January when stripped of the effects of a 2014 sales-tax increase.

Draghi also is far from achieving his inflation target, with consumer prices falling 0.6 percent in January from a year earlier, matching a record low. The ECB said on Jan. 22 that QE would start sometime in March and last until at least September 2016. It may be expanded along the way.

The potential for more ECB purchases as the BOJ stands pat will push the euro 3 percent lower to about 130 yen this year, said Greg Gibbs, head of Asia-Pacific markets strategy at Royal Bank of Scotland Group Plc in Singapore.

“The euro’s just not as far down the track as Japan,” he said.

To contact the reporters on this story: Netty Ismail in Singapore at [email protected]; Lucy Meakin in London at [email protected]

To contact the editors responsible for this story: Garfield Reynolds at [email protected] Nicholas Reynolds, Paul Armstrong

More from

  • Gross on the Hunt for Yield
  • Lenovo Faces Connecticut Investigation Over Superfish Adware
  • Can PayPal Go at It Alone?

Euro and yen slow Aussie dollar's slide

The Australian dollar’s race to the bottom is not going to plan.

Reserve Bank boss Glenn Stevens wants a lower Aussie dollar to boost economic growth, but the European and Japanese central banks also want the same thing with their currencies.

In the past seven months the Australian dollar has dropped almost US20c, from US95c in July to US76c in early February, and most forecasters expect it to bottom out between US70c and US72c this year.

But in the same period, the Australian dollar has only fallen slightly against the yen, and is higher against the euro.

HSBC head of Asian currency research Paul Mackel said it’s becoming difficult for the RBA to engineer a faster depreciation for the Australian dollar.

“This is a very similar dilemma for other central banks too, how do you weaken your currency when others are trying to jawbone theirs lower,” he said.

“This is what many central banks want right now, they want their local currencies to do the heavy lifting.”

One of the main factors behind the Aussie dollar’s fall against the greenback is the US Federal Reserve’s intentions to raise its interest rate, while the RBA looks to keep its rate stable or cut it.

The local cash rate is at 2.25 per cent, while European, Japanese and the American interest rates are close to zero.

That gives the Australian dollar a yield advantage, which still makes Australia and its currency attractive to investors even though the RBA is looking to cut the cash rate further.

Because of this, there are some days when the Australian dollar doesn’t fall as far as it should, LTG GoldRock director Andrew Barnett said.

“When the market has been nervous it’s been difficult for the Aussie dollar to go lower because people have been wanting to buy that higher yielding currency,” he said.

“I think it can get to US70c on the back of two things – lower interest rates in Australia, which we’re going to get, and a lift in US interest rates in July or August.”

Mr Barnett said it won’t fall to US70c in the next month or two, but it will in the longer term. “If we see the Australian economy trend the way it has and the US economy trend in the opposite direction it’ll be US70c before Christmas,” he said.

Other drivers for the Aussie’s recent fall are big slides in the price of oil and iron ore, but that trend is not expected to continue.