Euro hits 12-year low against dollar

Dollar and euro notes Image copyright Getty Images
Image caption The euro may have reach the same value as the dollar

The euro has fallen to its lowest level against the US dollar in 12 years after the European Central Bank (ECB) began its government bond buying programme.

It fell as low as $1.0560, before recovering a little. But many traders expect it may soon be worth the same as a dollar.

The ECB began its latest round of quantitative easing (QE) on Monday.

It will buy bonds worth €1.14tn over the next 18 months, flooding the market with euros.

Traders have reacted to the ECB's latest round of QE by selling euros and buying other currencies such as US dollars.

The US currency is appealing because the Federal Reserve looks to have completed its bond-buying programme.

The euro started its slide against the dollar in July last year as traders reacted to the divergence in policy between the ECB and the Fed.

The value of the euro has fallen 22.4% since 1 July, when a euro was worth $1.37.

Positive US data

An upbeat US jobs survey released on Friday provided an additional boost to the dollar.

"This opened up speculation again that the US will raise interest rates in June," says Jane Foley, senior currency strategist at Rabobank. This would attract foreign capital and boost the dollar.

In the eurozone Greece's economic woes continue to put downward pressure on the euro, bringing it closer to dollar parity.

The eurozone's growing current account surplus is encouraging Europeans to invest abroad causing the euro to weaken further, according to Deutsche Bank.

Analysis: Andrew Walker, BBC Economics Correspondent

It's what you expect when the economic performance of two currency blocs diverge in the way that the eurozone and the US have.

The stronger growth in the US means higher interest rates, because the Federal Reserve will raise its own rates, perhaps later this year, and also because there is more demand for cash to fund investment.

In Europe by contrast, the quantitative easing that is finally underway is driving down borrowing costs in the financial markets even further.

The weaker euro is also what you want, at least if you are at the eurozone end of this exchange rate.

Part of Europe's problem is weak demand for goods and services at home and the cheaper currency will make it a little easier to compensate for that by selling more abroad.

"The momentum is certainly building and there's a lot of talk of parity," says Ms Foley.

"We now see euro-dollar moving down to $1.00 by year-end, $0.90 by 2016 and down to a trough of $0.85 by 2017," said Deutsche Bank in a report published on Tuesday.

While further devaluation of the euro should give businesses in the eurozone a boost, the pace of change may pose challenges for companies that need to plan ahead.

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