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How much lower can the euro go?

The currency is headed towards equal footing with the US dollar.

Image: Dave Hogg

THE EURO COULD soon be on equal footing with the dollar if US officials have to step in to take some heat out of the world’s biggest economy.

The common currency hit a fresh, 12-year low this morning when it fell below $1.09 ahead of the European Central Bank starting its quantitative easing (QE) programme.

That process, to begin today, will involve the ECB creating new money on its balance sheet to lend to governments and other institutions in a bid to get static eurozone economies humming again.

While the €60 billion-a-month spending binge was officially announced in January – and was widely-anticipated for many months before that – its impending start has been enough to push the euro further down over the past week.

Davy chief economist Conal Mac Coille told TheJournal.ie QE was the obvious reason for the fall – although past history in other countries which had tried similar stimulus schemes suggested the decline would peter out soon.

“We have seen in previous episodes that you get a lot of action at the time of the (QE) announcement and that’s kind of it then – it stabilises after that,” he said.

We might see a bit more of a fall over the next couple of days.”

Euro Source: Yahoo! Finance

Parity coming?

Some analysts have predicted the euro would eventually hit equal footing with the dollar for the first time since 2002 and Mac Coille said it was definitely on the cards, although a lot depended on what happened in the US.

The country added 295,000 jobs in February and that pushed the unemployment rate down to 5.5%, adding to speculation the Federal Reserve would raise interest rates as early as June.

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Higher rates in the US would make investors more likely to put their money there to capitalise on the better returns, increasing demand for the dollar and its price against the relatively out-of-favour euro.

A low euro will further help exporters in Ireland and other countries shipping goods to the US or UK, although it is bad news for consumers buying many import goods or travelling outside the common currency zone.

The ECB already cut interest rates across the eurozone to record lows to stimulate growth but went a step further with QE after its cheap lending didn’t deliver a big enough bang to get the region going.

If the Federal Reserve starts increasing interest rates people could be talking about parity and that’s not too far away,” Mac Coille said.

But he added there were signs eurozone economies were finally recovering which could offset some of the strength in the US. The ECB last week upgraded its economic forecasts for the region, although the growth trends remain well below those in the US and UK.

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About the author:

Peter Bodkin  / Editor, Fora

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