Hard to believe even a few weeks ago, but now pros are talking about how the weakening euro could fall so low it could trade at parity with the dollar—or even lower.
The euro Wednesday was down about a half percent to $1.18, a nine-year low, after euro zone consumer prices fell on an annual basis for the first time since 2009. That fueled expectations that the European Central Bank will soon launch a quantitative easing, or bond-buying program. The common currency has lost 2.4 percent since the new year began, amid expectations of QE.
The last time the euro was trading at $1 or lower was in November 2002. It had sunk below the 1-for-1 level in the first year of its life, in late 1999, and traded as low as 84 U.S. cents in 2000. But in recent years, it has held above. For most of 2014, the euro was above $1.30.
But $1 is no longer unthinkable
“I’d say there’s a good chance it gets there before the election next November (2016),” said Marc Chandler, chief foreign exchange strategist at Brown Brothers Harriman. “We know the Fed’s going to be raising rates sooner or later, and the ECB is going to be easing sooner or later. I just see a steady grind lower.”
Chandler said the euro could temporarily stem its decline, once the ECB does announce QE. There are expectations the central bank will make some comments about a program to buy sovereign debt after its Jan. 22 meeting, but the actual program may launch later.
“Here’s what happened with the U.S. QE. We would buy the rumor, sell the fact,” he said. “As QE began we bought the dollar and sold Treasurys. I suspect we could see the same thing in Europe.”
Robert Sinche, global strategist at Amherst Pierpont, has a target of $1.10 as the low for the euro this year, and he’s skeptical it will hit parity.
“It would take something like a 2 percent higher funds rate by the middle of 2016 to take euro-dollar down as low as parity,” said Sinche.
But an accelerating U.S. economy with the euro zone wallowing in a deflationary, sluggish growth environment has fueled talk about an even lower level for the euro. That talk comes against a backdrop of superlow interest rates in Europe—with German bunds at negative yields up through the five-year.
U.S. Treasurys, at the long end of the curve, have seen intense buying since the start of the year, which has driven U.S. yields lower. The 10-year yield was higher Wednesday but still below 2 percent.
“I’m just thinking a lot of that is already in the market. Based on current interest rate differentials, it suggests euro-dollar should be trading at 1.25 but we’re at 1.18.” Sinche said $1.25 should be the top of the euro’s range this year.
But Chandler is more negative on the euro. “Maybe the Swiss National Bank is the only real buyer of the euro,” he said. Chandler said Switzerland’s central bank intervened to defend its cap against the euro last month. The SNB increased its reserves by 7 percent in November.
“I think even in the best of times, Europe’s likely to grow at 2 percent. I think the decline in the euro, the decline in interest rates, the decline in oil is going to help put a floor under the European economy,” he said.
Chandler said the U.S. economy, meanwhile, will help support a rising dollar. “The euro goes down. The U.S. gets better. Just as the euro had an overshoot to the upside, it gets to overshoot to the downside … I think a lot depends on what happens in the U.S.”