By Tommy Stubbington And James Ramage
Rip up your euro forecasts.
A day after the European Central Bank unveiled its bond-buying
program, the single currency was still in free fall, blowing past
analysts' expectations for how low the euro can go.
Some investors now say the euro could fall to the point where it
is on equal footing with the U.S. dollar for the first time since
it climbed above the buck in late 2002.
"If you would have asked me a few months ago, I would've said
that parity could be in the cards in the years ahead. Now, we can't
rule it out anymore even by the end of this year," said Thomas
Kressin, head of European foreign exchange at Pacific Investment
Management Co., or Pimco, which has $1.68 trillion under
management.
On Friday, the euro fell 0.8% against the dollar, to $1.1260, on
top of a 2.1% slide the day before. It is now down about 7% against
the dollar since the turn of the year and is at its lowest point in
11 years.
Morgan Stanley cut its estimate of where the euro will end 2015
to $1.05 from $1.12 previously. Bank of America Merrill Lynch sees
the euro now falling to $1.10 by the end of the year, from $1.20 in
an earlier forecast, while HSBC Holdings PLC analysts cut their
year-end expectation to $1.09 from $1.15.
The downgrades have echoed Wall Street's failure to predict
outsize pullbacks over the past year in global government-bond
yields and oil prices. Those declines have increased investor
unease over the risks facing the global economy.
Under the bond-buying program, known as quantitative easing,
central banks create new bank reserves to buy assets from financial
institutions. Central banks get bonds, and banks get money that
they can in turn use to extend new credit to households and
businesses. Such expansionary monetary policies usually weaken an
economy's currency in part because lower interest rates make a
currency less attractive to hold. In turn, a weaker currency makes
exported goods more competitive overseas, which could benefit
Germany's export-driven economy.
The euro has held to a relatively lofty level in recent years,
peaking at $1.60 in 2008 and trading close to $1.40 as recently as
last May, in part because the ECB arrived late to the world of
quantitative easing. The Federal Reserve, Bank of Japan and the
Bank of England, meanwhile, have implemented stimulus efforts. The
ECB's bond-buying plan--to the tune of EUR60 billion ($68 billion)
a month until at least September 2016--combined with record-low
interest rates is meant to spur growth and stoke inflation.
"The ECB has effectively said this will go on until we see a
significant adjustment in the path of inflation. That tells us
[quantitative easing] is going to be with us for quite some time,"
said Nick Gartside, chief investment officer for fixed income at
J.P. Morgan Asset Management, which oversees $1.7 trillion of
assets.
The flood of easy money and the fact that some central banks are
charging banks to hold overnight deposits "will make sure capital
continues to be pushed out of the euro area," said Pimco's Mr.
Kressin, who is betting the euro will continue to weaken against
the dollar. This combination means the euro "is a hot potato that
everyone tries to get rid of," he said.
The ECB's asset-purchase program aligns the eurozone's monetary
policy more closely with Japan's against that of the U.S. In
October, the Fed closed down its large-scale asset-purchase program
and is moving closer toward raising interest rates. Many Fed
officials have signaled they expect to stick broadly to their plan
to start lifting their benchmark short-term rate from near zero
around the middle of the year.
Investors predict the euro will fall faster against the
greenback than the yen in the near term because it has more
pressing factors driving it lower.
"The euro area stands to be a winner of the currency wars in
2015," said Jonathan Baltora, inflation-linked bonds fund manager
at AXA Investment Management, which oversees EUR607 billion of
assets, referring to the possibility that a weaker currency would
make European goods cheaper than those produced in Japan and
elsewhere.
U.S. Bank Wealth Management, which manages $126 billion, said
the falling euro is causing eurozone sovereign bonds to lose their
allure. U.S. Bank has positions in almost all eurozone sovereign
bonds. But the low yields and dim prospects for the euro have the
asset manager considering reducing them, particularly in German
bunds, said Jennifer Vail, its head of fixed-income research.
"We have projections for the currency and balance them with
projections for the debt," Ms. Vail said. "Add a weak euro, and
it's not attractive a bet at all...the market needs to get its head
around the implications [of the ECB's move]. The euro definitely
has more room to fall."
AllianceBernstein LP, which manages $473 billion, added to its
bearish euro currency bets one week ago in expectation of a bold
move by ECB President Mario Draghi at the central bank's meeting
this past Thursday, said Scott DiMaggio, director of global
fixed-income investments. The move surpassed the asset manager's
expectations.
"Capital will continue to leave the euro area," Mr. DiMaggio
said. "We think there will continue to be pressure on the euro.
They haven't even started to buy the assets yet." For now, though,
AllianceBernstein is holding its positions steady.
Write to Tommy Stubbington at tommy.stubbington@wsj.com
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