Föhrenbergkreis Finanzwirtschaft

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Record Capital Outflows Push Euro Toward Parity With Dollar

Posted by hkarner - 22. Dezember 2016

Date: 21-12-2016
Source: The Wall Street Journal

Higher interest rates in the U.S. are drawing money out of the eurozone

parity-eMore money has left eurozone financial markets this year than at any time in the bloc’s history, helping drive the euro toward parity with the dollar for the first time in 14 years.

The eurozone had its largest-ever net outflows in the 12 months to September, data from the European Central Bank showed Tuesday.

Eurozone investors bought €497.5 billion ($516.5 billion) of financial assets, such as stocks and bonds, outside the bloc in that period. Global investors, meanwhile, sold or let mature €31.3 billion of eurozone assets during the year. Together, that adds up to a net outflow of €528.8 billion, the most since the single currency was introduced in 1999.

Late Tuesday in New York, the euro was at $1.0388, its lowest level since January 2003, compared with $1.0403 late Monday.

Many analysts now believe that the common currency will hit parity with the dollar next year.

The euro has been sliding against the dollar since Donald Trump’s election victory spurred predictions of higher U.S. interest rates.

Last week the Federal Reserve increased rates for the first time this year and hinted at a speedier path of future increases at a time when the ECB’s benchmark interest rate is still negative. That has sent yields on U.S. debt soaring against those in Europe, making U.S. returns more tempting.

Given the poor returns in Europe, investors have been moving their money out of the region, selling euros as they do and so pressuring the currency lower.

European funds, meanwhile, want to buy stocks, bonds and other securities outside of Europe, driving up demand for other currencies, particularly the dollar.

“The dollar is very much on a tear, and the euro is one of the cleanest reflections of that,” said Ned Rumpeltin, European head of foreign-exchange strategy at TD Securities. “There’s a combination of policy divergence between the Fed and the ECB, and the two economies being on two different courses.”

exit-europeMr. Rumpeltin said he expects the euro to fall to—and even below—parity in the early months of next year.

He isn’t alone.

Analysts at Morgan Stanley and Goldman Sachs Group Inc. believe parity will happen by the end of 2017. Deutsche Bank AG predicts the euro will fall to at least $0.95 next year, driven by what it calls the “euroglut” of large capital outflows from the region.

Earlier this month, before the Fed’s meeting, analysts had predicted the euro would reach $1.057 by the end of 2017, near its current level, according to Consensus Economics, which aggregates the forecasts of hundreds of researchers.

But the dollar has jumped 2.5% against the euro since the Fed signaled it expects to raise rates three times next year, as opposed to the two times it predicted in October.

Higher rates tend to boost a currency as foreign money moves in to benefit from the higher returns. In the eurozone, a bond-buying program is also damping returns by pushing down yields in debt markets.

The difference between bond yields in the U.S. and Germany is at its largest in more than a quarter of a century. U.S. 10-year government debt yields 2.566%, against a 0.27% yield for comparable German bonds. The gap is so large that the dollar will likely continue rallying even if the rate differential stops widening, said George Saravelos, a strategist at Deutsche Bank, in a research note Friday.

The large gap between European and U.S. returns will continue to drive the euro down, according to some analysts.

“The last time this happened for more than a few months was in 1979 and 1997; the dollar rallied by 30% and 20%, respectively,” said Mr. Saravelos.

A strengthening dollar rally can have significant effects around the world, raising inflation for other countries and crimping U.S. exports. Emerging markets, where corporations and governments often borrow in dollars, are generally hit hardest.

For the eurozone, a weaker currency will likely be welcomed as it makes exports more competitive and comes at a time when inflation is not a worry.

Still, analysts have incorrectly predicted euro-dollar parity before. The forecast was particularly popular in early 2015, but the single currency didn’t go below $1.045.

And not all analysts are betting on parity this time around. The ECB extended its bond-buying program this month but also cut its monthly purchases. Any signs that it will curtail the program could strengthen the euro.

Antje Praefcke, a foreign-exchange analyst at Commerzbank AG, believes that the ECB will start running out of bonds to buy toward the end of next year, raising questions of whether it will begin reining in the program.

“That will offer some support to the euro against the dollar,” she said.

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