Equal value between the Euro and the US Dollar appears to be an increasingly likely possibility, as the value of the flagging European central currency against the greenback has contracted further, today arriving at 1.05, which is a reduction compared to yesterday’s 1.07.
The US dollar has remained a steady benchmark currency for worldwide transactions despite the increasing will of strong Asian economies such as China having introduced yuan clearing hubs in Western nations as the demand for the Chinese currency increases.
By contrast, the Euro is the sovereign currency of a region in which external debt is very high – in the case of France, 250% – whereas in the US it is only 99%, and in nations such as China, Indonesia and Mexico which are emerging economies with strong manufacturing bases, it is less than 10%.
Today’s low point for the Euro represents the highest fall in value against the dollar in the last 12 years, and with very little confidence in Mario Draghi’s asset buying plans with regard to quantitative easing, which were today cast out as futile by Societe Generale’s Head of European Rates Strategy Ciaran O’Hagan, who stated “It’s like the ECB is chasing its own tail,” today in a report by Bloomberg.
“Yesterday, the Bundesbank could have bought 2018 notes. Today it needs to go out to 2019. The universe of buyable bonds is melting like snow in the spring sun” said Mr. O’Hagan.
Switzerland made its position clear with regard to European debt crisis, pulling up its metaphoric drawbridge by removing the 1.20 peg on its sovereign currency, the Franc, against the Euro.
Traders have reacted to the ECB’s latest round of QE by selling euros and buying other currencies such as US dollars, thus creating less demand. The US currency is appealing because the Federal Reserve looks to have completed its bond-buying program, whereas the European Central Bank is only at the beginning of a very large commitment which was signed off by Mario Draghi at the beginning of the year.
LeapRate reported yesterday that the Euro had not slumped to 1.07 in twelve years, however today its value has shrunk futher. A likely factor is the lack of confidence caused by The European Central Bank having began its trillion-euro bond buying campaign on Monday which is scheduled to extend into late 2016, nudging down yields in Germany and other core EU sovereigns.
As trading volumes among western firms remained in the doldrums during February, Eastern economies are continuing to flourish with high manufacturing output and low external debt, whilst the levels of external debt in the Eurozone after a combination of bailouts, bank nationalizations and emergency measures backed by the IMF over the last six years have contributed to some of the highest liabilities, with China only owing 5% to overseas nations whereas France owes 250% which is very high compared to the United States’ 99%.
A question for traders to consider is whether the euro may dip to below the value of the US dollar in the imminent future.