London: The euro dived to its lowest since early 2003 against the dollar on Wednesday, dragging other European currencies with it, as the gap between European and US interest rates looked set to widen.
The euro has lost around a quarter of its value in a dollar rally that began last July and shows little sign of rallying.
Deutsche Bank on Tuesday forecast a fall to 85 US cents by the end of 2017.
The main reason is a collapse in European bond yields, which are set to stay low after the European Central Bank began its programme of buying up government bonds on Monday. Yields on German 30-year government bonds are now lower than those on the US’ two-year paper.
European stock markets should benefit, however, from the €1 trillion (Dh3.8 trillion) expected to flow into the financial sector, and the main indexes all gained 1-2 per cent on Wednesday. By contrast, Wall Street was set to open just slightly higher.
“It’s the euro versus everything,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets in London. “The way these moves look, it’s not just speculators piling into euro shorts, it’s actually net flow of capital out of the euro.” The euro sank as low as $1.0638 in early European deals, its weakest since 2003. The Norwegian and Danish crowns both reached similar lows. The Swedish crown fell to a six-year low.
“[The dollar and the euro] can go to parity and it can happen pretty quickly, within the next month or two,” said Gian Marco Salcioli, head of FX sales at the investment banking arm of Italy’s Intesa Sanpaolo Banca IMI. “It is like getting stuck in the traffic on the way to the seaside. You know you will get there, you just don’t know when.”
Little optimism was seen in Asia, where poor data out of China helped stock markets fall to two-month lows. The declines there and on Wall Street overnight and the gains in Europe indicate the impact of the ECB’s quantitative easing programme.
“I suspect that in another six months the market may look back and think that a further 20 per cent rally [and outperformance] in European equities should not have been considered all that unlikely under the circumstances,” said Gerry Fowler, BNP Paribas’s head of global equities and derivatives strategy.
Japan’s Nikkei added 0.3 per cent as better-than-expected machinery orders helped offset Wall Street losses. But the declining yen, which usually helps Japanese stocks by buoying exporters, led some to worry about other consequences, such as the burden placed on importers.
