No Demand for Cheap Euro at $1.18, Minus Interest Rate on Deposits, Bond Yields Negative

Central banks and reserve managers are breaking from past practice by showing little appetite to add euros as the currency tumbles.

The 19-nation euro fell in each of the past six months, dropping to $1.1843 on 7 January, its lowest level since February 2006. The currency was at $1.1868, down 15 percent from last year’s high of $1.3993 on May 8.

The total amount of reserves held in euros fell 8.1 percent in the third quarter, more than the currency’s 7.8 percent decline in the period against the dollar, according to the most recent figures from the International Monetary Fund. The last two times the euro depreciated 7 percent or more in a quarter, 2011 and 2010, holdings declined much less.

The data suggest reserve managers are passing up the chance to buy euros while they’re cheap, removing a key pillar of support. In August, European Central Bank President Mario Draghi cited the drop in central banks’ euro holdings as a factor that would help weaken the exchange rate and ultimately boost the region’s faltering economy.

Negative Interest Rate

The ECB has experimented with negative interest rates on deposits in an attempt to draw money out of safe government debt and into the broader economy. Yields on two-year notes in Germany, the Netherlands and France are all below zero on speculation the ECB is losing the battle against deflation.

Slowing Economy

A weaker euro is key to Draghi’s attempts to boost an economy that is slowing and push inflation up toward 2 percent, from a forecast minus 0.1 percent in December.

With the euro’s decline versus the dollar in the third quarter taken into account, the slide in holdings totaled only about $2.5 billion, according to a report by BNP Paribas SA on Jan. 6.

‘Euro’s Troubles’

In the third quarter of 2011, the common currency slid 7.7 percent, while its reserves fell 2.8 percent. A deeper plunge of 9.4 percent in the euro in the second quarter of 2010 only prompted a 1.3 percent loss in holdings, the IMF data showed.

The euro will fall about 1.5 percent to $1.17 by year-end.