LONDON — The euro dropped to an 11-year low as the European Central Bank expanded its bond-buying programme to include government bonds, a policy that tends to debase the currency.
Mario Draghi, president of the European Central Bank, ECB addresses the media during a press conference following the meeting of the Governing Council in Frankfurt am Main, western Germany, on Jan 22, 2015. (AFP photo)
The 19-nation shared currency fell against all but one of its 16 major peers, touching the weakest level in almost seven years against the pound. The ECB plans to buy 60 billion euros ($69 billion) a month of public and private debt until September 2016, President Mario Draghi told reporters in Frankfurt. Before the announcement, the ECB was said to have considered buying 50 billion euros a month. Switzerland’s franc climbed against the euro for a third day.
“It’s greater than expectations in terms of size and duration,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd in London, said of the ECB’s plans. “Today’s measures will keep downward pressure on the value of the euro.”
The euro fell 1.2% to $1.1471 at 10.02am in New York and touched $1.1453, the weakest level since November 2003. The shared currency fell 1.7% to 134.66 yen and touched 134.50, lowest since Oct 16. The dollar dropped 0.5% to 117.41 yen.
The ECB “decided to launch an expanded asset programme encompassing the existing purchase programmes,” Mr Draghi said. “We see sustained adjustment in the path of inflation which is consistent with our aim of achieving” rates close to but below 2 percent, he said.
While the ECB previously bought sovereign debt under its now-defunct Securities Market Program, it had thus far stopped short of the full-scale quantitative easing used by its counterparts in the US, UK and Japan.
Quantitative easing
“We remain comfortable holding short euro-dollar,” said Alvin T. Tan, a foreign-exchange strategist at Societe Generale SA in London, referring to a bet the euro will weaken. “The medium-term trend is clear and we would go with it.”
The shared currency dropped 1.1% to 75.81 British pence after reaching 75.71 pence, the strongest level since February 2008. It slid 1.1% to 98.75 Swiss centimes. Switzerland’s currency had been capped at 1.20 per euro until the Swiss National Bank removed the ceiling on Jan 15.
The Federal Reserve, which ended its third round of QE in October, owns about 20% of outstanding US debt, while the Bank of Japan boosted its annual debt-buying target to a record 80 trillion yen the same month. The Bank of England has kept its asset-purchase target unchanged at 375 billion pounds ($567 billion) since July 2012.
Six months
The euro has plunged for six-straight months against the dollar on anticipation of a bond-buying plan. Declines started midway through Mr Draghi’s news conference in May, after the euro has risen to $1.3993, its strongest level during his tenure. It began to slide after he said the ECB was ready to introduce more stimulus measures, and ended the year down 12% against the dollar, its biggest loss since 2005. The euro has extended those declines into 2015, falling about 5.1%.
One-week implied volatility on the euro against the dollar fell after the announcement. It dropped to 15.23% from as high as 20.66%.
The dollar is the biggest gainer in the past week among 10 developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. It gained 1.8%, the euro advanced 0.2% and the yen rose 0.6%.
“The US is standing out even more as central banks continue to ease policy,” said Junichi Ishikawa, market analyst at IG Markets Securities Ltd in Tokyo. “Conditions remain supportive for the dollar.”
The International Monetary Fund this week upgraded its forecast for the US even as it made the steepest cut to its global-growth outlook in three years.