THE EURO IS continuing its race towards parity with the US dollar – but things could get worse for transatlantic holliers with warnings the currency will plumb far greater depths within a few years.
The exchange rate hit a new 12-year low today when the euro plunged below $1.06 on expectations US regulators would soon raise interest rates for the first time in nearly a decade to unwind a bit of pressure in the expanding economy.
That likelihood sits in stark contrast to the situation in Europe, where the ECB has been running record-low interest rates and this week unleashed its quantitative-easing (QE) programme to try and get growth going.
Only a year ago the euro was bobbing along at close to $1.40, while in 2008 it peaked at nearly $1.60.
A move towards equal footing with the US dollar has already been widely tipped, but some analysts have predicted it has much further to fall still.
In a new briefing note, Deutsche Bank’s Robin Winkler and George Saravelos said they expected the euro to hit parity before the end of the year and a “new cycle low” of 85c by 2017.
That would be the lowest trading price for the currency since the changeover period in 2002.
The record fall would come from the analysts’ so-called “euroglut” scenario – a combination of the ECB flooding the market with new euro through QE and the region’s massive current-account surplus.
The surplus story
The pair believe that surplus – which represents net savings within the eurozone - will inevitably flow to foreign markets and the outward stream of money will keep the currency in the doldrums for years to come.
Germany, which contributes easily the biggest share of the surplus because of its all-powerful export industries, has previously been accused of derailing other countries’ growth by failing to spend that money at home and instead focussing on lending to everyone else.
But the flip side to the bad news for the euro is that the more it drops, the more competitive European (and of course, Irish) exports become when they are shipped outside the currency bloc to places like the US and UK.
That *should* eventually stimulate economic growth and give the currency a boost back towards its longer-term values.