The euro slumped to yet another new low overnight, passing below $US1.07 for the first time in more than 12 years.
The currency is tumbling against the strong dollar, down 22% from the near-$US1.40 levels it reached this time last year, and 11% from the start of 2015 alone. Eight days ago it was just below $US1.12 – it’s rare for an advanced economy’s currency to drop so much in barely more than a week. It’s now back at the value it was in January 2003.
Many analysts had been predicting that the euro would sink to reach parity with the dollar once again by the end of 2016. But at least one investment bank, Deutsche Bank, is fast-forwarding that projection.
Deutsche’s European researchers now expect parity by the end of this year, and for the euro to drop to $US0.85 by 2017: That’s as low as the currency has ever been against the dollar.
The strengthening dollar and weakening euro are being prodded along by a pretty fundamental divergence between the two currencies’ central banks. The Fed is hovering on the edge of raising interest rates, which would usually drive up returns for people investing in dollars, increasing the demand for the currency and driving up its value against others.
The European Central Bank, on the other hand, is now running into a QE programme that should last until at least 2016, which should continue to drive down interest rates and weaken the euro, which should have the exact opposite effect.
So don’t expect this trend to let up any time soon.