On Tuesday, May 19, the euro fell almost one percent against the U.S. dollar. This was mainly due to a top-ranking executive at the European Central Bank (ECB) signaling that the central bank will increase the pace of its bond buying. (Source: Financial Times, May 19, 2015.)
The ECB has embarked on quantitative easing (purchasing bonds) since March of this year. It plans to increase its bonds purchases in May and June because there is an expected liquidity shortage between July and August.
With the ECB ramping up its bond purchases, I ask if the euro will reach parity against the U.S. dollar. You see, printing money does decrease the value of currency, but there are many other problems that will add to the misery.
Euro Hurt by Eurozone’s Economic Activity
Consider this; in the first quarter of 2015, the German economy grew just 0.3%. This was below the expected 0.5% increase. In the last quarter of 2014, Germany grew 0.7%. Saying the very least, Germany, the biggest economic hub in the eurozone, is witnessing dismal growth. (Source: Federal Statistical Office of Germany, May 13, 2015.)
Other major hubs in the common currency region are struggling as well. For instance, France and Italy, the second and the third biggest hubs in the region, showed stagnated growth in the first quarter.
All told, there’s fear that the eurozone may enter into another recession.
Don’t Forget Greece
Greece is another problem for the euro. Greece’s government is running out of money very quickly. On Tuesday May 19, 2015, its finance minister said he expects an agreement with the country’s financial creditors within the next week.
Issues such as pension reforms, tax reforms, and deregulation of the labor market are yet to be resolved. Although Greece managed to find cash for its interest payment to the International Monetary Fund (IMF) on May 6, 2015, the future looks dire for the country.
As a result of this, there are talks about Greece leaving the common currency region. This phenomenon will certainly impact the euro.
ECB’s Monetary Policy and its Impact on the Euro
In a closer perspective, quantitative easing by the ECB may have a significant impact on financial markets, interest rates, and credit conditions in the eurozone. But I believe it will severely hurt the euro.
As news about the ECB getting involved in printing money emerged last year, the euro began to decline in value. Please look at the chart below.
Chart courtesy of www.StockCharts.com
Currently, the euro trades around 1.31 against the U.S. dollar. In around the same period last year, it was trading at 1.37. This represents a decline of over 18%.
Outlook for the Euro Against the U.S. Dollar
Don’t forget; the Federal Reserve is expected to raise interest rates in September. It will be likely that investors turn their focus toward the dollar and ditch the euro. As a result of all this, it shouldn’t be surprising to see the dollar and euro at parity before the end of 2015.
Furthermore, this occurrence has the ability to spook investors. I also won’t be surprised to see investors rushing towards gold. It’s a great way to protect wealth when a currency is losing its value quickly.