BLBG: Euro Racing to Record Drop as Draghi QE Purchases Depress Yields
(Bloomberg) -- The euro’s slump pushed it toward its biggest ever quarterly decline versus the dollar as European Central Bank purchases of sovereign debt sent bond yields to record lows across the region.
The shared currency has weakened 12.4 percent this year, with almost three weeks before the quarter ends, eclipsing the 11 percent decline during the credit crunch in the third quarter of 2008. The euro dropped to the lowest level in almost 12 years on Wednesday as ECB President Mario Draghi reiterated the central bank’s commitment to push inflation back toward to its goal, while the 1.1 trillion-euro ($1.2 trillion) quantitative-easing program entered its third day.
“QE is driving euro yields lower,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark. “People selling their bonds can buy European equities or they can get out of the euro zone. Everybody wants to pile into the momentum in the stronger dollar.”
The euro dropped 1 percent to $1.0596 at 7:45 a.m. New York time and reached $1.0560, the weakest level since March 21, 2003. The 19-nation common currency depreciated 0.6 percent to 128.80 yen, having touched 128.34 yen, the lowest since August 2013.
Policy Maker
Gains by euro-area government on Wednesday pushed yields to record lows after policy maker Benoit Coeure said in a speech the previous day that said that while there’ll be a scarcity of bonds to purchase, there’ll still be enough for the central bank to meet its targets.
French 10-year yields below 0.5 percent for the first time and rates fell to records from Spain and Italy to Finland and Austria. The ECB intends to buy 60 billion euros a month of private and public debt through September 2016, in a policy that typically debases currencies by increasing the amount of money in circulation.
“We can deploy and we will deploy monetary policy in a way that can and will stabilize inflation in line with our objective,” Draghi said at a conference in Frankfurt.
The euro is weakening in line with falling yields that have pushed the rate on German five-year notes to a record-low minus 0.125 percent, while U.S. Treasuries with a similar maturity yielded 1.63 percent.
Central Bank
The Bank of Japan is far from done driving down the yen if it wants to secure its 2 percent inflation target next year, a survey of economists by Bloomberg News shows. The median estimate of 27 economists in the March 5-10 survey suggests that the yen needs to fall to 140 per dollar, a level last seen in 1998, to help the central bank meet its goal. The yen weakened 0.3 percent to 121.51 per dollar on Wednesday.
The euro has slumped 7.4 percent this year, the most among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar, the best performer, has gained 7.3 percent and the yen advanced 5.6 percent.
The ECB may see more capital leave the region than policy makers anticipated under its bond-buying program, pushing record-low yields down even further, according to Deutsche Bank AG strategists George Saravelos and Robin Winkler.
“The greater the European outflows, the more the euro can weaken and the lower global bond yields can stay,” Saravelos and Winkler wrote in a note dated March 9. “The large current account-surplus combined with ECB easing and negative rates has initiated a process of large-scale capital outflows.”
The dollar has outperformed its major peers this year as the Federal Reserve considers the timing of its first interest-rate increase since 2006.
The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, gained 0.4 percent to 1,213.89 and was set for a record close.
To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Lananh Nguyen in New York at lnguyen35@bloomberg.net
To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Paul Cox
