The risks facing the euro are stacking up

It’s not only European Central Bank stimulus that has the potential to hurt the euro.

From the possibility that Britain might leave the EU and the impact of refugees flooding the region, to concerns over the economic outlook and political turmoil in Ireland as well as Spain, the euro is facing a slew of hazards.

Set alongside economists’ expectations for lower interest rates and more asset purchases from the ECB, investors are wondering how low it can go.

“There are monetary policy risks, there are political risks within the EU, there’s the geopolitical risks from outside with migration, and underlying it all you’ve got a pretty lacklustre growth picture,” said Frances Hudson, an Edinburgh-based global thematic strategist at Standard Life Investments.

“You could quite easily see a negative spiral developing.”

The euro is the worst-performing major currency after the pound over the past month, and touched a four-week low against the dollar this week.

In a further sign of unease, a gauge of traders’ expectations for price swings in the world’s most-traded currency pair over the next six months climbed this week to the highest since 2012, when ECB president Mario Draghi pledged to do whatever it takes to preserve the euro.

While a falling currency may bolster the region’s economy by stimulating exports, the recent declines reflect a troubled outlook for the bloc.

A decision by the UK to exit in its June 23 referendum would further damage trade and present unprecedented political challenges for the EU, while efforts to manage an influx of refugees from countries such as Syria by reducing free movement within the EU’s passport-free Schengen area also threaten to hamper the transfer of goods. European leaders will meet on Monday to try to hammer out a solution.

Hans Redeker, a currency strategist at Morgan Stanley in London predicts the euro will fall to parity with the dollar by the end of the year, and sees a “fairly high” possibility that he will have to lower that forecast to 96 US cents, a level not seen since 2002.

Political turmoil is also on the rise, raising the spectre of weak governments and a move away from fiscal reform.

Uncertainty remains here following last week’s vote which pointed to no clear winner, while Spain has been in a political deadlock for 10 weeks since its inconclusive election result.

Portugal last year endured weeks of wrangling before a Socialist led-government took power.

Still, the euro has weathered many storms in its 17-year history, and so far the growing list of concerns hasn’t knocked the currency out of the $1.05 to $1.15 range within which it has largely traded in the past year.

The median estimate of analysts surveyed by Bloomberg is for the euro to end 2016 at $1.08.