(Bloomberg) -- The European Central Bank's quantitative-easing program has significantly weakened the euro.
According to a study by ECB researchers, the bond-buying plan that is set to top 2.6 trillion euros ($2.9 trillion) at the end of this year lowered the euro-dollar exchange rate by about 12 percent -- more than half of the single currency's depreciation between September 2014 and the end of 2016. Most significantly, the impact takes a long time to fade.
The study finds that, as a rule of thumb, when the ECB balance sheet expands by 1 percentage point compared to that of the Fed, the euro depreciates by about 0.35 percentage point over nine months, before slowly climbing back.
As to the reasons of this impact, researchers Luca Dedola, Georgios Georgiadis, Johannes Graeb and Arnaud Mehl write:
“A relative QE shock that expands the ECB's balance sheet relative to that of the Federal Reserve depreciates the U.S. dollar-euro exchange rate by reducing euro-dollar short-term money market rate differentials, by widening the cross-currency basis and by eliciting adjustments in currency risk premia. A quantitatively substantial contribution to the exchange rate effects of QE stems from changes in the expectations about the future monetary policy stance.”
To be sure, ECB policy makers constantly say the exchange rate is not a target of their policies. Yet a weaker euro has helped the region's economic recovery in the past few years.
To contact the reporter on this story: Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Zoe Schneeweiss, Brian Swint
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