Thursday, March 12, 2015

Remember "Experts" Were Telling You EURO Will Replace USD ?

The euro just tumbled to another 12-year low

The euro slumped to yet another new low overnight, passing below $1.07 for the first time in more than 12 years.
The currency is tumbling against the strong dollar, down 22% from the near-$1.40 levels it reached this time last year, and 11% from the start of 2015 alone. Eight days ago it was just below $1.12 – 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 $0.85 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.

Deutsche Bank says the euro is going to $0.85

The euro tumbled to as low as $1.0714 earlier, the lowest level since April 2003.

Tuesday’s loss has pushed the euro deeper into bear market territory as it is now down 23% from its May 2014 high near $1.4000.

What are the reasons for the euro’s weakness?

In a new research note, Deutsche Bank’s Robin Winkler and George Saravelos reiterated their ‘Euroglut’ concept. Simply put, it argues that the euro-area’s gigantic current account surplus, combined with the European Central Bank’s quantitative easing (QE) program, and negative interest rates will continue to cause the euro to tumble. 

Winkler and Sarvelos say the region, which is currently a debtor to the world, must become a net creditor to the world with its international investment position needing to reach +30% of GDP (currently -10%) before the current account surplus is sustainable. This can only happen with net capital outflows of at least 4 trillion euros. 

So, what does this mean for the euro?

“[W]e continue to expect broad-based euro weakness,” they wrote. “European outflows have been even bigger than our initial (high) expectations over the last six months, so we are revising our EUR/USD forecasts lower. We now foresee a move down to 1.00 by the end of the year and a new cycle low of 85cents by 2017.”

So it appears the sell-off in the currency is far from over.



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