European Central Bank is risking the Euro stability

The additional liquidity offered by the European Central Bank (ECB) might pose some risks to the financial stability of the region, according to the bank’s president, Mario Draghi.

Addressing investors in Frankfurt, the president said the ECB new policy measures may have some risks, and further suppress benchmark sovereign bond in the euro zone.

The quantitative easing programme of the ECB, which started on Monday, has triggered some incredible moves in the market. Everywhere you look, you can see the effects of extra liquidity pumped in by the ECB. The purchases of ECB reduce returns on safer assets, and encourage investors to shift to higher, riskier assets. It appears that the market is in desperate need to front run bond-buying programme as the fear of collateral scarcity fall faster than expected.

Presently, the EUR is poised for the biggest quarterly decline. The currency is slumping to another law today. The fact that the EUR is falling for some good reasons, and has the ECB’s support, there is a convincing reason that further heavy losses will continue. The large divergence in the monetary stance of the ECB and the Fed is not going to change anytime soon. Not even the negative interest rates will force the cash out of the euro zone: depressing the EUR even further. The ECB wants a much weaker EUR and the bank is getting it, since euro zone domestic investors invest abroad for higher yields and higher returns.

It is also very interesting to see the interest in U.S debt decline when you approach rate hikes. The decline is because the Treasuries are now trading at a premium to euro zone debt that creates some value, no matter the rate hike. Another thing, if the positive net effect of the stronger dollar, which investors are anticipating in the coming months, still justifies the decline move. Today’s 10-year Treasuries auction is very interesting and gives a green light for interests in U.S debt, making it very attractive at the moment.

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