Mario Draghi, President of the European Central Bank tried to re-assure the markets and the result was dramatic.
The ECB chose to reduce its quantitative easing programme from 80 to 60 billion euros a month this week, and the markets bought Euros. Then, Mr Draghi tried to explain, and the Euro fell sharply.
Indeed it fell by about 1% which for an economy worth around 12 trillion dollars (that’s the euro area) a year, a 1% fall in the currency works out around $120 billion.
And it all boiled down to the difference between taper and tweak.
Earlier this decade, the US federal reserve began to talk about tapering quantitative easing, and the markets went into a panic – emerging markets especially suffered, with stocks and currencies pertaining to these countries falling sharply. It became known as taper tantrum – the fear being that as US monetary policy tightened, money would flow out of emerging markets into the US.
So, when the ECB announced a reduction in the level of quantitative easing, the markets were overcome with this overwhelming sense of déjà vu.
But then Mario sought to explain, this was no taper just a tweak he said, and indeed this policy (that’s taper) “was not discussed and is not even on the table”. Instead, it seems that the ECB is planning to continue the policy for the foreseeable future,” when pushed Mr Draghi said that a taper was “fairly far-away.”
He said: “if the outlook becomes less favourable or if financial conditions become inconsistent [with its inflation goal], the Governing Council intends to increase the programme in terms of size and/or duration.”
And at that point, buying built on a sense of déjà vu turned into selling built on a sense of anti-climax.
Jennifer McKeown, chief European economist at Capital Economics explained it thus: "Large ECB asset purchases now look set to continue throughout next year and probably well into 2018. This marks a stark contrast with our expectation of significant policy tightening by the US Federal Reserve, supporting our view that the euro is set to depreciate to parity or lower against the dollar.”