Euro slides on eve of ECB stimulus programme

Five Euro Note

The pound has hit a seven-year high against the euro, bringing cheer for British holidaymakers but underscoring fears about the fragile European single currency as markets prepare for a flood of emergency electronic cash.

Related: Why the FTSE 100 has hit a record high

The euro sank to €1.387 against the pound and also sold off sharply against the dollar before next week’s launch of a €1.1tn stimulus programme in the eurozone. The European Central Bank is to start pumping €60bn a month into the euro economy as the first phase in its quantitative easing programme. The scheme is intended to help get the eurozone back on the path to sustained growth.

But, while the ECB gets ready to fire the starting gun on a massive support package,the US Federal Reserve looks to be gearing up for a move in the opposite direction on the other side of the Atlantic. A US interest rate increase looked more likely on Friday after upbeat news on the jobs market.

Government figures showed the world’s largest economy added 295,000 jobs last month, up from 239,000 in January and much better than expected. That helped the US unemployment rate drop to 5.5%, its lowest for more than six and a half years.

Some traders believe US borrowing costs could rise as soon as June from near zero.

Paul Dales, senior US economist at the thinktank Capital Economics, said the latest report certainly raised pressure on the Federal Reserve. “Even if wage growth is still subdued, the Fed can’t hang around before raising rates,” he said. “If the Fed waits until wage growth rises, it will be well behind the curve and will have to raise rates much more aggressively at a later stage.”

The backdrop of diverging central bank policy made for sharp moves on currency markets. The dollar soared as traders mulled the prospect of near-term tightening in the US, imminent loosening in the eurozone and no change in the UK’s record low interest rates.

The US currency was at its highest for more than 11 years against the embattled euro, with one euro now worth just $1.0845 - down almost two cents on the day. Some traders predict the two currencies being worth the same, or reaching parity, in coming weeks.

There were several factors keeping the euro under pressure, said Ranko Berich, head of market analysis at foreign exchange company Monex Europe. “The fall in the euro over the last couple of weeks has been nothing short of a collapse, with both the euro-dollar exchange rate and euro-pound exchange rate plumbing multiyear lows. A powerful confluence of factors has contributed to the euro’s demise – monetary easing from the ECB, political uncertainty and a rampant US dollar that has laid the euro’s weaknesses bare,” he said.

The pound also lost ground against the US dollar. After the strong US jobs report, sterling hit a four-week low of about $1.508, having lost more than 2% over the week against the dollar. Traders also cited uncertainty about May’s general election as weighing on the pound.

Powered by article was written by Katie Allen, for The Guardian on Friday 6th March 2015 18.46 Europe/London © Guardian News and Media Limited 2010


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