Euro-Dollar Parity Gets Closer as Euro Sinks to 12-Year Low

The march to euro-dollar parity continued today (Wednesday) as the currency slipped below $1.06 for the first time since 2003.

In January, our 2015 euro forecast saw euro-dollar parity happening sometime in the first half of 2016.

"The trend of the euro is down," Money Morning Capital Wave Strategist Shah Gilani said back in January. "It would be virtually a miracle for the euro any time in the foreseeable future - meaning the next few quarters, at least, to a year or two - to turn around."

That's where the euro finds itself now. It's fallen 12.6% in 2015. And while it may seem oversold given its rapid descent, nothing in the Eurozone indicates it's preparing for a rally anytime soon.

If anything, this swift decline only suggests the numerous forecasts calling for euro-dollar parity understate the Eurozone's troubles. In January, analysts at Goldman Sachs said the euro could fall even further - to $0.90 - come 2018.

"I think Goldman analysts are too conservative," Money Morning Chief Investment Strategist Keith Fitz-Gerald said. He sees $0.90 as a possibility as early as 2016.

Here's why the euro is falling, and why euro-dollar parity is inevitable...

Euro-Dollar Parity Driver No. 1: The Start of Eurozone QE

The most immediate cause of the euro's lightning fast plunge is the start of quantitative easing. European Central Bank President Mario Draghi announced it in January, and it began Monday.

euro dollar parityEurozone QE was in the back of everyone's mind in 2012. That's when Draghi parroted the dovish central bank pledge to do "whatever it takes" to save the euro.

But back then, nobody batted an eye. The ECB is prohibited from financing individual member countries' debts, as per European Union treaties. And surely any move toward Eurozone QE would require some kind of legal battle.

That all goes without mentioning German obstinacy in the face of any inflationary monetary policy.

But in 2014, Eurozone QE looked to be inevitable.

Deflation fears first ramped up in March 2014. This is when bond traders poured into Eurozone debt. They wanted to get out in front of any QE measures that would drive down yields and push up the face value of those bonds.

That first signal was followed by discouraging reports.

Inflation fell to 0.7% in February - below expectations. Then at the end of March more reports rolled in to suggest inflation was at its lowest level in four years.

All signs pointed to Eurozone QE.

Draghi gained an important ally in late March. That's when Jens Weidmann, president of the German Bundesbank, said QE was not "generally out of the question." This cleared away an important roadblock to Eurozone QE - fierce German opposition.

Draghi responded...

In June he cut the rate for banks to deposit funds at the ECB from zero to negative 0.1%. That means the ECB would charge banks to deposit at ECB facilities. He cut it further in September to negative 0.2%. He then announced the ECB would begin a sort of mini-QE, buying covered bonds and asset-backed securities.

None of these measures helped stave off falling prices. In January falling oil prices helped plunge the Eurozone into deflation officially. Later that month, Draghi announced that the ECB would buy 50 billion euros ($63.4 billion) a month in Eurozone member government debt. This is in addition to the 10 billion euros ($10.6 billion) a month in ABS already happening. His aim was to expand the monetary base by 1.2 trillion euros ($1.3 trillion) by September 2016.

The jury's still out on whether this will work. Consumers and smaller businesses need to borrow and spend this money the ECB is flooding the financial system with. If they don't, then it will do little to help the Eurozone. And that will only further undermine the ECB's credibility.

That leaves an air of uncertainty in the Eurozone. The euro will continue to fall on inflationary monetary policy of course. But it will also be crushed by waning confidence in the efficacy of the actual policy, should the numbers not back it up.

And that goes without mentioning Greece...

Euro-Dollar Parity Driver No. 2: The Greek "Wildcard"

Greece was supposed to exit its International Monetary Fund and EU-authored bailout programs, totaling 240 billion euros ($253.8 billion), in 2014.

That's what then-Greek Prime Minister Antonis Samaras promised in September 2014. No longer would Greece be prisoner to international bailout monitors. The austerity measures that sparked social unrest in Greece could finally end.

That didn't happen. Samaras would have to go back on those promises in December. Greece fell short on internationally imposed budget control measures.

Samaris had to request an extension of the program going into 2015. It would mean at least two more months of tax hikes and pension cuts.

This was the last straw for Greek voters. Samaris called for a snap parliamentary election in January. He hoped that in doing so, he would reaffirm the Greek public's confidence in him and help shore up political uncertainty that was shutting Greece out from borrowing in international markets.

It didn't work. They ousted the ruling New Democracy party. They failed to get the austerity-demanding international authorities off their backs.

And in stepped Syriza on January 25.

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"I see Greece as the main wildcard," said Money Morning's Fitz-Gerald. "Threats to leave the Eurozone are nothing new for the debt-ravaged nation, but the strident tone of the newly empowered anti-austerity government does seem more serious than previous scares."

The Syriza government has, since its victory, been in talks with Eurozone finance ministers to restructure debt payments. But that first required yet another extension of the bailout to ensure Greece didn't go bust. The talks preceding an eleventh-hour negotiation to extend the bailout only highlighted a troubling rift in the Eurozone.

On one end is unmoving Germany. To them, Greece needs to tighten their belt. No excuses.

Then there's the Syriza. They need to make good on promises to their people of standing up to regional authorities. All without risking their access to financing that is largely controlled by Germany.

The political situation is tense.

It is raising the possibility that Greece could leave the Eurozone. The euro has nowhere to go but down. But a "Grexit," which looks even more possible as the Eurozone crisis roils on, will only hasten the pace of that downfall.

The Bottom Line: The euro has fallen a lot. And at this point euro-dollar parity in 2015 is approaching faster than many analysts expected. There's simply too much to fuel the euro's fall and not enough to support a rally. Whether it is uncertainty surrounding Eurozone QE - an inflationary policy in itself - or fears of a Greek exit, euro-dollar parity is going to happen.

Here's How You Can Profit off the Euro's Fall...The European Central Bank this past week has made some already enticing investment opportunities all the more attractive. They not only reaffirmed basement-level interest rates, but kicked off Eurozone QE on Monday. And it's providing strong "Buy" signals for these three investments...