Markets braced for fresh euro turmoil
THE euro looks set for a roller-coaster ride this week following elections in Greece amid warnings the single currency could be heading for ‘parity’ with the dollar.
The single currency has crashed nearly 20pc against the greenback in less than a year – sinking from $1.39 in May to an 11-year low below $1.12 last night.
It has also tumbled against the pound with sterling hitting a seven-year high of around €1.34. However, the pound has dropped below $1.50 against the dollar.
The euro’s slide accelerated last week after the European Central Bank unveiled plans to pump more than £800bn of emergency funds into the economy through quantitative easing in a bid to stave off deflation and kick-start growth.
Worries about the outcome of yesterday’s Greek elections – and threat of the country quitting the eurozone in a so-called ‘Grexit’ – have also put pressure on the single currency.
At the same time, the dollar has strengthened on expectations that the US Federal Reserve will raise interest rates this year.
Kathleen Brooks, research director at currency experts Forex.com, said ‘there could be further wild moves even after the euro weakness we witnessed last week’.
Predicting another fall against the dollar, she said: ‘Parity, or even lower, is a possibility.’
The president of banking giant Goldman Sachs warned that the soaring dollar could have a ‘chilling effect’ on the US economy and cautioned the Fed against a rate rise.
‘ What I am concerned about is the ability of the US to raise rates with what’s going on in the world,’ Gary Cohn told the World Economic Forum in Davos.
‘Look at the strength of the dollar today. It will only get stronger if you raise rates. That will have a chilling effect on the US economy’.
Christine Lagarde, managing director of the International Monetary Fund, said a US slowdown could be disastrous for the world economy.
‘If the US is in a bad place we are short of any engine at the moment,’ she said.
Expectations of higher interest rates typically strengthen a currency by attracting investors looking for better returns. Cutting rates or printing money via QE usually has the opposite effect. The US brought its QE programme to an end last year and the Fed has signalled that rates could rise in the coming months – driving the dollar higher.
By contrast, ECB president Mario Draghi last week outlined plans to print around £ 45bn every month from March this year to September next year or even longer - amounting to a total of more than £800bn.
The Bank of England was expected to raise rates from their all-time low of 0.5pc - where they have been since March 2009 - late last year or early this year.
But analysts now believe UK rates could stay on hold until 2016 or even longer given inflation has fallen so far below the 2pc target. ‘The first hike could be as far away as 2017,’ said economists at City consultancy Fathom.