Torrent of Cash Exits Eurozone

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from The Wall Street Journal,

Money is going to dollar, currencies of smaller countries.

A major shift in the flow of money around the globe is driving down the euro at a rapid clip, boosting the U.S. dollar and leaving smaller countries to struggle with the consequence of an extraordinary flood.

A wave of cash is leaving the eurozone, where returns on safe assets are infinitesimal, if they are positive at all, and headed to the U.S. and other refuges such as Denmark and Switzerland.

Europe’s common currency has fallen 22% against the dollar in less than a year, from $1.39 to $1.08. The euro touched a 12-year low of less than $1.05 this month. The European Central Bank is holding interest rates, while the U.S. Federal Reserve is looking to raise them—a combination that pushes the euro down against the dollar.

But the fall, many analysts said, has been exacerbated by the willingness of big investors to move their assets out of euros, not just by speculators placing bets that the euro will fall. The diverging paths of European and U.S. monetary policy have been a catalyst for European savers and investors to reallocate their portfolios away from Europe and into the U.S. in search of returns.

Big central banks appear to be following suit, with China and the oil-rich Middle Eastern countries that had poured some of their foreign reserves into euros changing course.

The ECB pushed interest rates down to nearly zero and the rate it pays on commercial-bank deposits below zero last summer. This year, it started quantitative easing, in which it prints euros to buy bonds.

Since the ECB brought in negative deposit rates in June, more cash has flowed out of the eurozone to buy foreign stocks and bonds than has flowed in, ECB data show. Recently, a steady trickle has become a torrent. In the final quarter of 2014, the gap was €124.4 billion ($134.35 billion).

The euro has fallen, but European stocks and bonds have rallied. That is largely thanks to quantitative easing, which should push investors to buy riskier assets such as stocks, while the ECB’s own heavy buying of bonds keeps that market supported even as some investors move outside the eurozone.

The starkest consequences of these flows have been seen in the eurozone’s small neighbors. The Danish central bank has cut interest rates four times this year to discourage foreigners from piling into the krone. To keep the currency, which is pegged to the euro, from climbing, it has printed huge volumes of kroner to sell for euros.

Switzerland was so swamped by inflows that the central bank abruptly lifted its cap on the Swiss franc in January, leading to a dramatic one-day surge of more than 40% in the franc’s value.

But even the U.S. has been far from immune. Massive demand from European investors has helped drive the dollar higher this year. The rush into the dollar has also fueled a rally in U.S. Treasurys despite expectations that the Fed will raise interest rates this year. Foreign investors increased their holdings of Treasury bonds by $374.3 billion in 2014, Federal Reserve data show. That trend has continued this year.

Another effect has made the flood out of Europe especially powerful. Unlike the Fed’s three waves of quantitative easing, the ECB’s version is coming as European governments are trimming budgets. That means they issue fewer bonds, and European investors have more reason to look abroad for returns instead of paying dearly for relatively scarce assets at home—or having cash in euros that they might need to pay to hold on to.

“There are more and more euros being printed, but these are hot-potato euros,” Mr. Hallam said.

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