After opening up as a costlier currency compared to the Dollar, the Euro has maintained either parity or higher than parity levels with the American currency. However, this-longer-than-a-decade record might finally break in a historical change of events when Euro falls below parity levels. This estimation does not look far-fetched and is fairly predictable in light of the several economic indicators and factors at play that favor a stronger dollar and a weaker Euro.
By Wednesday this week, the Euro had dipped almost 24 percent of its dollar comparison value over a period of last 11 months. After staying at $1.39-a-Euro levels for most of last year, the Euro has been constantly tumbling ever since and has reached a 12 year low of $1.05. Several reasons can be explained as causes for this fall in Euro’s value.
For one, a major reason for this fall in the value of the Euro is the starting of the European Central Bank’s (ECB) government bond buying program, which is also otherwise known as ‘quantitative easing’ (QE). With this measure, the ECB will buy government bonds of different European Union (EU) constituent countries in order to sustain liquidity in EU economies.
This step was devised after several EU countries such as Greece, Spain, & Italy faced debt crises in their economies. The ECB’s QE program will see it pumping €1.14 trillion into the EU economy over the next 18 months. Investors see this program as a potential threat to their Euro holdings as the Euro is bound to lose sheen in light of increased availability.
As a result of this announcement and the subsequent latest round of ECB’s QE, currency traders reacted immediately by selling the Euro and by parking their money in currencies such as the US dollar. On the other hand, the dollar now looks very attractive as the Federal Bond Buying program has just drawn to a close and no more dollars will be pumped into the national economy. This will directly translate into lesser dollar floating in the market, thus making it dearer and consequently an attractive vehicle for investment.
This Euro slide is also not helped by other impactful realities that are favoring the US dollar. For e.g., the strong U.S. employment data figures released recently imply an economy on the upswing. This implies that central bank rates will rise as a result of a rising economy. Increased bank rates will make investors pump more money into the US banking system to gain from the higher interest rates. Because of these reasons, analysts are also not chary of predicting the fall of Euro to as low as 90 cents a pop.