Some Investors See Single Currency Falling to Parity With U.S. Dollar
Rip up your euro forecasts.
A day after the European Central Bank unveiled its
bond-buying program, the single currency still was 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.
Late Friday in New York, the euro fell 1.4% against the
dollar, to $1.1206, on top of a 2.1% slide the day before. It is now
down 7.4% against the dollar since the turn of the year and is at its
lowest point in more than 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 a
country’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.
A day after the ECB’s move, European stocks and bond
prices soared. The Stoxx Europe 600 climbed to a seven-year high, ending
the session up 1.7%. Germany’s DAX index rose 2.1% to another record,
while the U.K.’s FTSE 100 gained 0.5% and France’s CAC-40 advanced 1.9%.
Government bond prices from Spain, Italy, Portugal, Germany and
elsewhere hit records, pushing yields lower.
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 €60 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 €607 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