Bundesbank Finds Euro Weakens on QE Signaling But Not Purchases

  • Expectations damped trade-weighted exchange rate by 4.7%
  • Actual bond buying didn’t have significant impact on euro

The European Central Bank’s bond-buying program weakened the euro, but only when the measures were signaled or announced, according to the Bundesbank.

Since 2014, expectations for quantitative easing have accounted for a 4.7 percent drop in the euro against a basket of currencies, and 6.5 percent against the dollar, according to a study in the German central bank’s monthly report published Monday. In contrast, and unlike under the U.S. Federal Reserve’s program, actual purchases had no significant impact.

The study has implications for the effectiveness of QE for providing monetary stimulus to companies and households. While policy makers have acknowledged a commitment by the Group of 20 nations not to use exchange rates as a policy target, they have acknowledged that a weaker euro helps the economy by making exports more competitive and fueling inflation via higher import prices.

The ECB’s asset-purchase plan has its roots in 2014 when President Mario Draghi started fueling expectations that QE might be needed as the euro area’s inflation rate slipped toward zero. Even so, disagreements in the Governing Council meant it was introduced only in stages leading up to the announcement in January 2015 of large-scale purchases of government debt. The actual buying started almost two months later and has since been extended twice.

“It is conceivable that the depreciation of the euro in the period before the March 2015 start of especially high-volume government-bond buying -- which was surely related to expectations and signaling effects in relation to the purchase program -- already represented the total and future effect of the program on the euro exchange rate, or an overshoot,” the Bundesbank said.

The single currency traded at almost $1.40 in May 2014. By January 2015 it had slipped below $1.20 and by March it was below $1.10. While the asset-purchase program now totals more than 1.5 trillion euros ($1.6 trillion), the exchange rate has further weakened only to around $1.07.

The study shows that three of the six largest daily losses the euro recorded against a basket of 38 currencies since its inception in 1999 were related to QE. The 2.6 percent slump following the January 2015 commitment to buy government bonds was the second-largest ever registered.

Yet when it investigated the impact of actual purchases, the Bundesbank found that bond-buying didn’t significantly affect the euro, even though debt sales to the central bank prompted investors to shift their portfolios into foreign currencies. That contrasts with the effect of QE elsewhere, such as the Fed’s program.

The authors caution that isolating the effects of QE is difficult. The ECB also cut its interest rates during the period under review, while the Fed started to tighten policy in the U.S.