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How the ECB Announcement Affects Exchange Rates

January 22, 2015

How the ECB January Announcement Affects Currency Exchange Rates

Today the European Central Bank (ECB) announced €60bn/month of quantitative easing until September 2016. This amounts to over €1 trillion.

What Does Quantitative Easing Mean for International Currencies?

The ECB President, Mario Draghi said that the decision was taken to counter two unfavourable factors – weak inflation and weak growth.

The BBC confirmed, “Earlier this month, figures showed the eurozone was suffering deflation, creating the danger that growth would stall as businesses and consumers shut their wallets, as they waited for prices to fall.”

How Quantitative Easing Works

European Central Bank January Announcement - How It Affects Currency Exchange Rates

Not All Economists Like Quantitative Easing

As Roger Bootle of Capital Economics told BBC’s World Service Business Report, “I am not the greatest fan of quantitative easing – I don’t think it’s going to cure the European malaise. The point is, there is not much else in the locker.”

Whilst there was initial movement on the euro when the announcement was made, it remained relatively stable. There was certainly no currency tsunami as some pundits predicted.

In fact, several commentators predicted international currency volatility based on the ECB’s actions. Indeed, Hans-Werner Sinn (President of Germany’s Ifo Institute for Economic Research) told CNBC:

“There was so much capital flight in anticipation of the QE to Switzerland, that the Swiss Central Bank was unable to stem the tide, and there will be more effects of that sort.” (For more information, see: What Happened To The Swiss Franc (CHF)?)

The ECB’s actions could have major implications for other currencies. The Financial Times even suggested the actions were likely to stoke global currency wars:

“Switzerland highlights the futility of currency wars. Others will counter the ECB’s moves. The BoJ is still struggling to convince investors it will achieve its inflation goal — and Japanese carmakers’ biggest exporting rivals are German. Bank of England hawks who wanted to raise interest rates are in retreat. Denmark and Canada have cut interest rates this week; India did last week.”

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