EUR/USD Parity in Sight: Euro Takes a Battering Due to Growing Divergence

Written by | Wednesday, March 11th, 2015

The euro is slowly, but surely, sinking towards parity with the US dollar as the common currency dropped to a 12-year low of €1.0735 versus the greenback on Tuesday. The euro is expected to hit parity with the US dollar in the coming weeks as a combination of quantitative easing (QE) program, falling European bond yields, unrelenting concerns about Greek exit from the Eurozone, and the overall grim outlook for the global economy continues to fuel a plunge in its value. The euro has lost about 10 percent of its value against the US dollar and the pound sterling since January. One important contributing factor was the European Central Bank’s (ECB) recently launched €1.1 trillion QE program, which will pump an extra €60 billion into the Eurozone economy every month until September 2016.

Market analysts predict that the euro will slide further against the greenback because the ECB’s bond-buying program is likely to be accompanied by the first interest rate hike in the US since the financial crisis six years ago. Supported by stronger US fundamental data along with some hawkish Federal Reserve statements, the mighty US dollar appears set to continue to achieve multiyear highs across a number of currency fronts. The falling euro may also force Denmark’s Central Bank to follow the lead set by Switzerland in February and abandon rules capping its kroner currency to the euro, as the kroner becomes too strong to maintain the link. Yet another disincentive for foreign investors to hold euros stems from the negative or low yield scenario throughout the Eurozone – for example, German 10-year bund yields have now fallen to +0.28%, equaling their all-time trough. The silver lining of a weak euro is, of course, that the falling currency makes the Eurozone’s exports more attractive – which could in the end aid the block’s economic recovery – though it more expensive for the Europeans holidaying outside the Eurozone.

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