Euro sinks after ECB plans a ‘dovish’ reduction of its stimulus program

Emmanuel Dunand | AFP | Getty Images

ECB President Mario Draghi reacts as he delivers a speech during a meeting of the Committee on economic and monetary affairs (ECON) at the European Parliament, in Brussels, on May 29, 2017.

The euro fell sharply percent against the dollar shortly after the European Central Bank (ECB) announced plans to trim the bank’s monthly asset purchase program from January.

Crucially, the bank also noted that the program could be extended again if necessary.

The ECB has been running its bond buying at a pace of 60 billion euros ($70.1 billion) per month as the central bank attempted to stoke growth and inflation among euro zone member countries. The central bank announced Thursday that the bank will now extend the program from January at a pace of 30 billion euros until at least September 2018.

The euro was down 0.55 percent for the session, while the yield on the 10-year German bund fell around 3 basis points.

Analysts at Citi Research said in a note earlier this month that the ECB’s aim is to taper the asset purchase program without causing a “market tantrum.” Citi concluded that the neutral level of quantitative easing (QE) that the ECB could introduce while maintaining market calm was around 250 billion euros in total.

Citi added that the size of the monthly purchases would provide a signal to investors on whether QE is most likely to come to a hard stop or be open to continuation.

“For example, 20 billion euros per month would imply that QE could immediately end once the extension is complete. In contrast, 40 billion euros per month is far more likely to require a further taper,” said the note.