Divergent: The euro fizzles while the US dollar sizzles

SINGAPORE - Like a magician pulling off a sudden disappearance act, the strength of the euro is fast vanishing.

On Thursday, the euro hit a fresh 12-year low of US$1.0535, having fallen about 13 per cent aganst the dollar since the start of the year.

The two currencies are diverging so fast that the euro may soon reach parity with the dollar - or a one to one exchange rate - something not seen since 2002 when the physical notes and coins of the euro were first introduced.

What's the cause?

The US dollar is soaring against the euro on because of their starkly diverging monetary policies.

The European Central Bank (ECB) is adding stimulus - amounting to 1.1 trillion euros (S$1.62 trillion) - to the 19-member eurozone while the US Federal Reserve is moving ever closer to an interest rate hike.

The ECB began its landmark 60 million euros per month bond buying programme on Monday (March 9) with the aim to fend off deflation and boost the eurozone economy by pumping more money into real economy.

Meanwhile, a strong jobs report out last Friday (March 6) has bolstered market speculation that the Fed will raise rates in June.

How low will the euro go?

UOB is forecasting the euro would test the US$1.03 mark by the middle of the year, reach parity with the dollar by the third quarter and fall to 97 US cents by the end of the year.

Bank of Singapore's senior currency strategist Sim Moh Siong is also not ruling out the possibility of the euro falling below parity.

"There are green shoots of recovery in Europe but that's all from depressed levels of activity and there are still risks on the horizon in Greece where there could be tensions over the implementation of reforms.

"If things flare up anew, it could affect sentiment and lead to capital flight to safety, away from the euro."

How will euro-dollar divergence affect the Sing dollar?

Even though the Singapore dollar is also weakening against the greenback, the healthier state of the economy here would mean a stronger Singdollar versus the euro, says UOB economist Lee Sue Ann.

"It's a good time to go to Europe for shopping. We're expecting the euro to hit $1.41 by the middle of the year and below $1.40 by the end of the year," she said.

The euro traded around $1.4632 in Asian trading on Thursday.

As Europe is a major economic partner of Singapore, the Singdollar, which trades against a basket of currencies including the euro, would also be under downward pressure, noted Mr Sim.

"The euro could weaken more than the Singdollar because of QE in Europe while for Singapore, the economy is doing ok so it is debatable whether there will be further policy easing."

The Monetary Authority of Singapore is slated to hold its policy-setting meeting in April.

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