The euro has already lost around three per cent against the dollar since early October - AFP Photo
While investors are betting the euro will fall against the dollar
next year, hopes that the European economy will therefore get a boost
could be premature: It may not depreciate at all against currencies of
other major trading partners.
next year, hopes that the European economy will therefore get a boost
could be premature: It may not depreciate at all against currencies of
other major trading partners.
As speculation grows that the European Central Bank (ECB) will ease
monetary policy more aggressively, some economists predict the euro
could even slide to parity with the dollar by the end of 2015 from
around $1.22 now.
monetary policy more aggressively, some economists predict the euro
could even slide to parity with the dollar by the end of 2015 from
around $1.22 now.
However, the dollar is no longer the most important element in the
ECB’s trade-weighted euro index, its favoured gauge of the euro’s
strength. That position is now held by the yuan and against the Chinese
currency — along with others such as sterling, the Swiss franc and
Japanese yen — the euro’s prospects are far from clear. The euro has
already lost around three per cent against the dollar since early
October when the ECB said it would buy rebundled packets of debt, as it
tries to fight off the threat of deflation in the eurozone.
ECB’s trade-weighted euro index, its favoured gauge of the euro’s
strength. That position is now held by the yuan and against the Chinese
currency — along with others such as sterling, the Swiss franc and
Japanese yen — the euro’s prospects are far from clear. The euro has
already lost around three per cent against the dollar since early
October when the ECB said it would buy rebundled packets of debt, as it
tries to fight off the threat of deflation in the eurozone.
Expectations are strong that the ECB will move on to quantitative
easing next year by buying government bonds. This would involve printing
money in the hope of pushing inflation that is close to zero towards
its target of just under two per cent, a policy that should weaken the
euro.
easing next year by buying government bonds. This would involve printing
money in the hope of pushing inflation that is close to zero towards
its target of just under two per cent, a policy that should weaken the
euro.
The ECB reckons that a 10 per cent fall in the euro’s effective
exchange rate would deliver 40 to 50 basis points of much-needed
inflation to the eurozone. However, the euro has actually gained around a
third of a per cent on a trade-weighted basis since October.
exchange rate would deliver 40 to 50 basis points of much-needed
inflation to the eurozone. However, the euro has actually gained around a
third of a per cent on a trade-weighted basis since October.
China is now the eurozone’s biggest trading partner, and the common
currency has held steady against the yuan over the past month while it
has fallen 1.5 per cent against the dollar.
currency has held steady against the yuan over the past month while it
has fallen 1.5 per cent against the dollar.
Any euro rise against the yuan would effectively import disinflation
from China, hurting the ECB in its campaign to avoid the kind of
deflation that has hit the Japanese economy so badly in the past decade.
from China, hurting the ECB in its campaign to avoid the kind of
deflation that has hit the Japanese economy so badly in the past decade.
The US economy is expected to grow strongly in 2015, prompting the
Federal Reserve to start raising interest rates and thereby boosting the
dollar, but the outlook for China and its currency is far less clear.
Federal Reserve to start raising interest rates and thereby boosting the
dollar, but the outlook for China and its currency is far less clear.
“The potential for the yuan to become more volatile next year is
certainly there,” said Paul Lambert, head of currency at Insight
Investment. “There are certainly scenarios in which the yuan would
weaken.”
certainly there,” said Paul Lambert, head of currency at Insight
Investment. “There are certainly scenarios in which the yuan would
weaken.”
Saxo Bank’s Chief Economist Steen Jakobsen reckons the yuan will fall
at least five per cent against the dollar next year as the Chinese
economy slows. Many economists argue that the main way for an ECB
programme of quantitative easing to work would be through weakening the
euro, but this may be tricky to achieve.
at least five per cent against the dollar next year as the Chinese
economy slows. Many economists argue that the main way for an ECB
programme of quantitative easing to work would be through weakening the
euro, but this may be tricky to achieve.
Among other constituents in the ECB basket, third-ranked sterling can
expect a bumpy year, with Britain facing its most uncertain
parliamentary election in decades in May.
expect a bumpy year, with Britain facing its most uncertain
parliamentary election in decades in May.
The euro may also struggle to weaken against the Japanese yen and the Swiss franc, ranked four and five respectively.
The Bank of Japan recently expanded its own programme to stimulate
the domestic economy, while the Swiss National Bank has promised for the
past three years to cap the franc at 1.20 per euro. Earlier this month,
the SNB also said it would start charging banks for deposits in francs
for the first time since the 1970s, hoping to ease upwards pressure on
the currency.
the domestic economy, while the Swiss National Bank has promised for the
past three years to cap the franc at 1.20 per euro. Earlier this month,
the SNB also said it would start charging banks for deposits in francs
for the first time since the 1970s, hoping to ease upwards pressure on
the currency.
Stephen Gallo, European head of FX strategy at BMO Capital Markets,
said that furthermore, the euro would remain structurally strong, helped
by the eurozone’s current account surplus. ECB measures that would, for
example, revitalise the asset-backed securities (ABS) market, could
attract foreign interest, further supporting the common currency.
said that furthermore, the euro would remain structurally strong, helped
by the eurozone’s current account surplus. ECB measures that would, for
example, revitalise the asset-backed securities (ABS) market, could
attract foreign interest, further supporting the common currency.
“Rather than seeing huge capital outflows because the ECB is offering
cheap liquidity ... you could actually get a decent amount of interest
in euro-denominated asset markets,” he said. “Liberating the capital
markets in the eurozone should be positive for the euro.”
cheap liquidity ... you could actually get a decent amount of interest
in euro-denominated asset markets,” he said. “Liberating the capital
markets in the eurozone should be positive for the euro.”
Most of the other constituents in the euro index are other European
currencies, heavily exposed to the eurozone economy and from countries
with very low inflation. According to Toscafund’s chief economist Savvas
Savouri, many of them are set to fall sharply against the euro in 2015
Business - Trade-weighted euro may be set for shock upswing in 2015currencies, heavily exposed to the eurozone economy and from countries
with very low inflation. According to Toscafund’s chief economist Savvas
Savouri, many of them are set to fall sharply against the euro in 2015
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