Euro down after ECB's disappointing performance

The euro showed its biggest drop in 16 months on Thursday, after the European Central Bank announced its plans to continue buying government bonds until September next year. The ECB met the expectations of the financial markets by halving its bond-buying programme from €60 billion to €30 billion, but investors had not counted on the central bank continuing to buy government bonds until at least September 2018.

The euro/dollar exchange rate has been at a relatively high level of $1.18 to $1.20 against the U.S. dollar since August, as currency traders were convinced that the ECB would taper its stimulus program in the near term. But now that it appears that the central bank is extending its monetary stimulus for another year and will keep interest rates low for much longer, a feeling of disappointment prevails. The euro went with 1.4% down and dropped to a level of $1.16 against the dollar.

Phasing out incentive programmes

The ECB's decision to slowly taper its bond-buying program comes five weeks after the Federal Reserve announced its plans to reverse its bond-buying program and reduce its $4.5 trillion balance sheet. The U.S. central bank is also grappling with the legacy of hundreds of billions in debt securities, which have been bought up since the outbreak of the financial crisis in 2008 to bring down interest rates. Yellen wants to slowly but surely bring it back to the market, but that is a process that could take years.

It also remains to be seen whether central banks such as the Fed and the ECB will be able to completely reverse their asset purchase programmes. Putting the debt back on the market will increase the interest costs for governments, businesses and households, which have taken on more and more debt in recent years. If a new crisis breaks out, there is a good chance that central banks will have to turn on the money tap again.

Euro falls hard after ECB's disappointing performance