ECB-Fed split in rate policy fuels talk of euro sliding to parity with dollar
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Policymakers at the European Central Bank (ECB) are expected to deliver more interest-rate cuts this year than their US peers, leading to talk of the euro touching parity with the dollar. Bank of America Corp (BofA) and Germany’s LBBW are warning of euro weakness if the differing pace of rate cuts at the ECB and the US Federal Reserve play out. The euro could touch parity with the dollar this year, according to Geoffrey Yu, a senior strategist at Bank of New York Mellon. ECB officials led by president Christine Lagarde are expected to prepare markets for an initial rate cut on June 6. The euro is down almost 2% this year at US$1.09. Strategists at BofA are weighing scenarios where the euro returns to parity against the greenback if the Fed stands pat on rates this year and the ECB delivers three quarter-point cuts. Every extra cut the ECB delivers relative to the Fed can trigger a 1% move in the euro-dollar exchange rate. Options markets imply only about a 15% chance of the euro reaching parity with the dollar over the next 12 months.

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