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SUNDAY BUSINESS GUARDIAN www.guardian.co.tt MARCH 15 • 2015
The euro is notching one
milestone after another
as it drops against major
currencies. On Wednes-
day, it hit a 12-year low
against the dollar and
many think its descent
has further to go.
The fall in Europe's single currency has been
dramatic: 25 per cent since May, when it traded
just shy of US$1.40. Back then, companies
across Europe openly fretted about the strength
of the euro and its impact on their exports.
Such concerns are now more likely to be
heard out of the US or Britain, which are seeing
their currencies rebound against the euro. On
Wednesday, the euro fell as low as US$1.0557,
its weakest against the dollar since April 2003.
So what's prompted the euro's plunge?
The main reason is the European Central
Bank has not only cut interest rates but also
started creating more euros to put into the
The ECB had been reluctant to do so for
years, but in 2014 it changed course. As pol-
icymakers faced the prospect of minimal
growth and falling prices, which can further
weigh on an economy, it cut its main interest
rate in September to 0.05 percent. The move
hit the euro by reducing the potential returns
on investments in the eurozone.
As that proved insufficient to turn the euro-
zone around, the ECB has started buying gov-
ernment bonds in the markets with newly-
created money. The hope is that the 18-month
1.1 trillion-euro (US$1.12 trillion) monetary
stimulus will shore up the economic recovery
and get inflation back into the system.
Whether or not the stimulus works, it will
increase the number of euros in circulation,
diluting their value.
The stimulus should also keep a lid on the
borrowing rates of most eurozone countries
in the markets.
The ECB's buying shores up the value of
the bonds, thereby reducing the potential yield
on those bonds. With the yields on European
government bonds at historic lows and in
some cases negative, the returns to investors
are negligible at best, further weighing on the
The euro has fallen against many currencies,
but its drop has been particularly pronounced
against the dollar.
That's because while the ECB's policies
have been weakening the euro, the US Fed-
eral Reserve's are bolstering the dollar.
As the American economy keeps growing
and creating jobs, the Fed ended its own
bond-buying stimulus programme and
says it is ready to soon start raising interest
rates. Last week's stronger-than-expected
jobs figures for February ratcheted up
expectations that the first rate increase
will take place in June.
For those looking for higher returns,
holding US assets has become a more
enticing prospect. Just look at the returns
available on holding the 10-year US Treas-
ury; the yield stands at 2.14 per cent
against 0.18 per cent for Germany's.
The dollar has been rising not only
against the euro but a range of currencies.
Against the Japanese currency, it was near
122 yen, the highest since 2007.
Concerns over a Greek exit from the
euro have been an additional burden on
the euro over the past few months.
The rise of a radical new government in
Athens that wants to renegotiate a large
part of the country's bailout terms has
raised the prospect of a "Grexit."
Those tensions are likely to linger as
Greece and the eurozone creditors will be
stuck for weeks, if not months, on how
to lighten the country's rescue loans.
Many eurozone economies still have
trouble growing, and that has discouraged
some investors from putting their money
in the currency bloc.
Relatively small economies like Portugal
and Ireland are just emerging from bailout
programs that required them to make huge
budget cuts. Big economies like Italy, Spain
and France are still focusing on reducing
debt rather than spending.
At the very least, the economic outlook
for the eurozone isn't rosy, and that's likely
to require lower interest rates from the
ECB than the Fed, for example, and that
prospect has been another reason hurting
A man walks past a mural in the northern Greek town of Thessaloniki, on Wednesday, March 11, 2015. Greece is quickly running out of cash and has to repay debts this month to the International
Monetary Fund---which co-funded Greece's 240 billion euro bailout---as well having as treasury bills coming due. (AP)
The euro's tumbling---here's why
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