Euro Posts Strongest Quarter in 5 Years Defying ECB's Stimulus

  • Shared currency climbs to highest level since October
  • Central bank expands bond-buying purchases this week

The euro surged this quarter by the most in five years, defying convention as the European Central Bank bolstered its monetary stimulus, a step that tends to debase a currency.

The 19-nation shared currency has erased about half of its 2015 decline versus the dollar this year. ECB President Mario Draghi announced an expansion to the bond-buying program, new long-term loans to banks and cuts to interest rates on March 10, only for the euro to climb after he said he didn’t see the need to add cut rates again. Even as other policy makers have since said rates aren’t at the lower bound, the euro has risen to the highest level since October versus the greenback.

Gains in the euro have spurred comparisons with Japan’s efforts to increase its monetary stimulus. Even as the Bank of Japan introduced negative interest rates this year, the yen has risen more than 7 percent against the dollar. The ECB first cut its deposit rate below zero in June 2014.

“If indeed the aim was to push down the euro, clearly it has not worked at all for over a year now,” said Alvin T. Tan, a London-based strategist at Societe Generale SA. This is also the experience of the BOJ, he said. “The failure of the ECB in weakening the euro is not unique in that sense. It does tell us about the limitations of central bank policy in trying to effect the exchange rate.”

The euro climbed about 5 percent this quarter to $1.1403 as of 2:56 p.m. London time, the biggest increase since March 2011. It reached $1.1412 earlier Thursday, the highest since Oct. 15.

Europe’s shared currency could climb to $1.16 in the next month, SocGen’s Tan said. The bank forecasts a drop back to $1.05 by year-end.

Inflation Goal

The ECB begins increased monthly bond purchases, to 80 billion euros from 60 billion euros, this week. The raft of new measures are intended to help spur consumer-price growth in the region. Inflation hasn’t come near the ECB’s goal of just under 2 percent since January 2013.

“People are head scratching at the moment,” said Josh O’Byrne, a London-based currency strategist at Citigroup Inc. Policy makers “are making less of the euro as an effective easer of policy. You could say the Bank of Japan and ECB were champions in the currency war and realized they didn’t get much for it.”