Euro sinks to 12-year low against dollar as QE bites

The euro traded at a 12-year low against the dollar on Wednesday, extending a broad decline since the European Central Bank kicked off its €1.1 trillion asset-buying programme at the start of the week.

The ECB began creating new money to buy sovereign bonds on Monday in an effort to support growth and lift euro zone inflation from below zero.

That sent yields on the debt of nearly all euro zone countries to record lows on Wednesday, with the yield on 10-year German bonds, which set the standard for euro area borrowing costs, falling below 0.2 per cent for the first time ever.

The euro dropped 1 per cent to $1.0582 before falling to $1.0560, the weakest level since March 21, 2003.

It has fallen 12 per cent so far in 2015 and almost 25 per cent since last May.

“It’s the euro versus everything,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets in London. “The way these moves look is it’s not just speculators piling into euro shorts, it’s actually net flow of capital out of the euro.”

The common currency has also been pressured by persistent uncertainty about cash-strapped Greece as it gears up to resume talks with creditors in Brussels later in the day. Many fear the possibility Greece could exit from the euro zone, and Italy’s economy minister warned this outcome should be avoided.

Gains against the euro helped the dollar reach an 11-1/2-year high against a basket of major currencies of 99.018, extending an almost 25 per cent rally since July 2014.

While the euro zone is flooded with liquidity, upbeat US employment data on Friday heightened market speculation the Federal Reserve could lift interest rates as soon as the middle of this year.

But some investors are concerned the dollar might have gained too much too quickly.

“With key dollar pairs rapidly overtaking many forecasts once viewed as aggressive and hitting established trading targets, many market participants are unsurprisingly questioning whether moves have been excessive and could be prone to correction,” analysts at BNP Paribas wrote in a note.

Reuters