Quantitative Easing Forces Euro Downward

The Euro is having its fair share of problems these days as the currency fell to its lowest against the US dollar in nine years. The root cause of this slide is the prospect of substantially lower interest rates over the longer term in the Euro Zone. The US Federal Reserve saved the day in the USA with its bond purchases to the tune of $85 Billion each and every month. This served to drive interest rates down and provide credit to a floundering financial system. The EU opted for austerity measures reminiscent of the approach the USA took and the 1928 market crash. Those measures led the USA and the rest of the world into the Great Depression. Luckily for the USA the head of the Fed at the time of the 2008 was Ben Bernanke, an expert on the causes of the Great Depression. It may be a bit late but the EU is finally pursuing the course that pulled the US economy out of the doldrums. The problem for the Euro is that quantitative easing forces the Euro downward as a result of lower interest rates.

Lowest in Nine Years

As noted in MarketWatch the Euro is at its lowest level in almost 9 years.

The euro fell to its lowest level in almost nine years against the dollar on Monday, amid speculation the European Central Bank will soon expand its stimulus programs aimed at avoiding deflation as the region’s economy struggles to grow.

Analysts say ECB President Mario Draghi is under pressure to take further measures like large-scale purchases of government bonds, a policy known as quantitative easing, which could add around €1 trillion to the central bank’s approximately €2 trillion-balance sheet. This pushes yields down, which move inversely to bond prices, and lessens the attraction of the euro. The central bank’s governing council’s next monetary policy meeting is in two weeks on Jan. 22.

“Time is running out for the ECB” to announce further quantitative easing measures, said Mitul Kotecha, head of foreign exchange strategy for Asia Pacific at Barclays in Singapore. The firm forecasts the euro EURUSD, -0.58%  falling to $1.17 against the U.S. dollar by the end of the first quarter and to $1.07 by the end of the year.

It appears that the Euro will continue to fall as the European Central Bank institutes much needed measures t stimulate an EU economy that threatens to slide back into recession. And the Greek debt default dilemma is not helping either.

Greek Elections

Elections are coming up this month in Greece. This is the country that has had to be bailed out by the EU to prevent default on their sovereign debts. The standard recipe was applied. The central bank gives you money and you put your economic and political house in order. However, the austerity measures applied have not been appreciated in Greece where unemployment has been well over twenty-five percent. The Financial Post reports that the possibility of Greece leaving the EU concerns the powers that be, such as German Chancellor Merkel.

A Greek exit from the euro area would have “incalculable” consequences and leave Germany facing the biggest loss on European financial aid extended to Greece, a lawmaker in Chancellor Angela Merkel’s coalition said.

“Europe can’t afford a Greek exit,” Joachim Poss, the Social Democratic Party’s deputy finance spokesman in the German parliament, said in a phone interview. Suggestions by allies of Merkel that the 19-nation currency bloc could weather Greece’s departure amount to “playing with fire at a fragile moment in the stability of the euro area,” he said.

The EU is stuck between a rock and a hard place. They need to pour money into a stimulus program to prevent more situations like the one in Greece and they need to keep bailing out Greece’s failing economy or see the start of a possible breakup of the European Union. The Forex result of this will likely be that the Greek dilemma and quantitative easing will force the Euro downward.

Trading the Euro

Bloomberg refers to the Euro’s Wild Ride which is likely not yet over.

The euro is starting 2015 with a tumble against the dollar, raising the prospect that for a second year analysts weren’t bearish enough in their forecasts.

Falling as much as 1.2 percent today and grazing $1.18, their target for year-end, the euro touched its weakest since March 2006. Should it close below that level this week, trading patterns suggest the euro-dollar pair, the world’s most-traded, could reach the 2005 low of $1.1640.

It would appear that the downward movement of the Euro is far from over, quantitative easing or not.