• Euro plunges and may go lower
  • Pound fails to rally and slips against the dollar
  • Canadian dollar shows more weakness
  • Another turbulent week waiting

Over two years ago, European Central Bank (ECB) President Mario Draghi saved a collapsing euro amid concern that Greece might default on its debts and exit from the Eurozone. He promised that policy makers would do “whatever is needed” to preserve the euro. Yesterday, President Draghi possibly saved the Eurozone from deflation and another recession by intentionally devaluing the euro.

The euro fell to an 11-year low against the US dollar when President Draghi announced that the bank will purchase 60 billion euros in assets a month. They will continue the purchases beyond September 2016 if the Eurozone inflation rate fails to rise to a target level of 2 percent. The Eurozone inflation rate fell by -0.2 percent year-on-year in December.

By promising to purchase over one trillion euros of assets, President Draghi may have delivered on his 2012 promise of doing “whatever is needed.” This time, President Draghi is betting that asset purchases will add more euros to the market, thereby lowering interest rates and devaluing the euro further. A weaker euro will raise import prices and provide a cover to domestic producers to raise their prices. Concurrently, lower interest rates will stimulate more demand and help pull up the prices.

It will take a few months to see if President’s Draghi’s plan will work. Meanwhile, the US dollar is expected to go higher. Funds from low interest rate economies such as Japan and now Europe are flooding into US assets in search of higher returns and currency appreciation. Stay tuned.

EUR-USD plunged yesterday to an 11-year low and is struggling to find a firm support level early this morning. The pair is trading below 1.1400 and with no major news or event scheduled for today, it will try to find a new course next week.

GBP-USD fell to a near 18-month low yesterday as funds poured into the US dollar in search of higher returns. The pound failed to gain as the Bank of England indicated earlier in the week that it is not planning to raise the key interest rates anytime soon in response to falling prices and increasing current account deficits. This morning, the December retail sales report will be released and may provide some support to the pound.

USD-JPY climbed higher yesterday and is poised to go higher today. With the short term interest rate near zero and the Bank of Japan looming to buy more assets, an oversea demand for the yen has waned this week.

USD-CAD extended to a 6-year high yesterday. The Bank of Canada is prepared to lower the benchmark interest rate by another 0.25 percent in March if crude oil prices fail to reverse. Today, the December consumer inflation report will be released.

Finally, next week promises to be another turbulent one. Greece will hold its national election on Sunday. The Federal Reserve is meeting on Wednesday.

Have a great weekend.