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Last Updated : Dec 03, 2015 05:04 PM IST | Source: CNBC-TV18

The final journey to euro-dollar parity may start today

Analysts expect ECB chief Mario Draghi to extend the central bank's quantitative easing programme, probably announce another euro 10 billion of additional asset purchases each month, as well as cut deposit rates.

It is something that has been expected for a while and the European Central Bank (ECB) meeting today could be the trigger that leads to it.

Analysts expect ECB chief Mario Draghi to extend the central bank's quantitative easing programme, probably announce another euro 10 billion of additional asset purchases each month, as well as cut deposit rates.

The move could put downward pressure on the euro and is expected to come ahead of a possible increase in interest rates from the Federal Reserve, a move that could give the US dollar strength.

In light of this, the euro may reach parity with the dollar by early next year, says Sarah Hewin, Senior Economist, Standard Chartered.

In an interview with CNBC-TV18, Hewin said she sees a "big potential for substantial easing", a move that will likely result in further downside for the year. The euro is perched at the key 1.05 level, close to the low it made in March this year from where it bounced back all the way to 1.15 before falling back again.

Excerpts from the interview.

Sonia: What is your own expectation from the European Central Bank (ECB) meeting today?

A: We think that we will see further easing as you said, we are expecting a further cut in the deposit rate, that would take it to minus 0.3 percent, a 10 basis point cut from where we are today.

And we think that we will see an additional euro 10 billion of asset purchases per month and so increasing the quantitative easing (QE) programme. Now, there is scope for them to do a lot more. They could decide to extend the QE programme beyond September, next year. They could increase the scope of what they buy.

They certainly talked about buying municipal bonds maybe corporate bonds. So, there is a big potential for quite a substantial easing and we think that they may be a little bit more cautious and may want to keep some of the potential easing policies on hold so that if there was a big shock event, that they would still have some ammunition, some scope for countering that. So, our own view is that it will be a further cut in the deposit rate and a further small increase in the QE purchases.

Anuj: We have a situation where Fed may hike rates later this month and we have further easing from the ECB. In this kind of an environment where do you see a] the dollar-euro moving and a] the European equity markets moving?

A: European equity markets have responded already quite nicely to the heavy hints that we had at the October 22 meeting that there would be further easing in the pipeline. And I think that we would probably expect the equity markets to improve further.

If we look at some of the economic data that we have had, they are pointing to an economy which is growing at a pretty solid pace, we had survey data out today, which confirmed that activity in November improved, orders are strong, so the outlook is still very good.

Now, in terms of what the implications are for the euro, we think that this policy divergence would be ECB easing, the Fed, we think, raising rates on the December 15, that to us suggests that we will see further downside for the euro and we have a forecast of euro moving down to 1.03 per euro by the end of the year and reaching parity by the early months of next year.
First Published on Dec 3, 2015 05:02 pm
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