EUR/USD drops to 11-yr low, as Euro bond market plunges

08/03/2015 06:25 AST

The euro fell to an 11-year low against the U.S. Dollar for the third consecutive day, as currency traders weighed the divergence that may ensue from the start of a monetary easing program in Europe with a potential interest rate hike in the United States.

EUR/USD closed at 1.0841 at the end of U.S. trading, down 0.0186 or 1.69%. The pair reached a daily-high at 1.0979 early in U.S. morning trading, before dropping 0.01% upon the release of a stronger than expected U.S. jobs report. In 2015, the euro has fallen more than 10% against the U.S. dollar.

On Friday, the euro slipped below 1.09 against the dollar for the first time since 2003. The currency's plunge continues, as the European Central Bank is set to begin its€60 billion a month quantitative easing program on Monday. ECB president Mario Draghi announced on Thursday that the bond buying program will last until September, 2016 or beyond if the central bank does not approach its target inflation rate of 2%.

Bond buying programs, such as quantitative easing, are pursued by policymakers as a way of stimulating the economy by driving up the market price of bonds. When bond prices increase, yields decrease lowering the rates for mortgages and other loans.

One far-reaching implication of printing vast quantities of a currency is that it drives down its value against other currencies on the foreign exchange market. The euro also fell more than 1% against the Yen and 0.85% against the Australian dollar on Friday.

More tellingly, the spread between 10-year U.S. Treasury notes (2.25%) and 10-year German bunds (0.39%) reached its widest margin in 25 years. Since late-January, the yield on 10-year U.S. treasuries are up more than 35%. The lower yield in German bonds, meanwhile, sent Spanish, Italian and Portuguese bonds spiraling to record lows.

The dollar soared against the euro on Friday following the release of positive U.S. employment data. The U.S. added 295,000 jobs in February, according to the U.S. Bureau of Labor Statistics, more than 55,000 above forecasts for the month and January's figure of 239,000. Employment growth, meanwhile, has averaged 288,000 over the last three months, as the current unemployment rate fell from 5.7 to 5.5%.

Data concerning wage growth was less promising, as weekly hourly wages inched up three cents from January and 2% from this point last year. The Federal Open Market Committee could provide further details on the timetable for raising interest rates at its next meeting on Mar. 17-18.

Investing.com