The president of the European Central Bank, Mario Draghi, has strongly defended the bank’s bond-purchasing programme, which began on Monday and is set to inject at least€one trillion euros into the financial system over the course of the next 16 months.

Speaking at a conference of economists and financial analysts in Frankfurt last week, Draghi said the benefits of the programme were filtering down to consumers and businesses and were protecting the rest of the euro zone from the turmoil in Greece.

While he acknowledged that there were some risks in the policy, because it lowers the yield on government bonds and pushes investors to undertake riskier actions, he claimed these dangers were ‘contained.’

The rise in the dollar’s value has reignited fears that so-called emerging markets could ace financial problems because the more expensive dollar increases the real debt and interest burden from dollar-denominated loans

Draghi tried to downplay the significance of the ECB’s move, saying that while asset purchases were ‘unconventional,’ they were not ‘unorthodox,’ adding, ‘In fact, they are eminently orthodox.’

But experts are well aware that nothing like the asset purchasing programme of the world’s major central banks, which has pumped at least $5trn into the global financial system, has ever been seen in history.

On the first day of the programme, the ECB bought €3.4bn euros worth of bonds in line with its objective of buying 60bn euros a month at least until September next year, and possibly even longer, because officially the ECB has ‘no duration target for the programme’.

Within days of its commencement, the purchasing programme is having a significant impact on financial markets, setting up a series of processes that could have major adverse consequences, contrary to Draghi’s reassurances.

One of the most striking effects so far is the rapid fall in the value of the euro against the dollar. This year, the value of the euro has dropped 12.8pc, already beating the 10.6pc decline recorded in the third quarter of 2008, in the midst of the global financial crisis.

It is expected to fall even lower as the bond-purchasing programme proceeds, with predictions that the euro is headed for parity with the dollar after falling to just over $1.05 on Thursday.

The other major consequence is the further fall in yields on bonds, as their prices are pushed higher as a result of the entry of the ECB into the market. The yield on the benchmark ten-year German bund fell to 0.199pc after starting the year at 0.5pc. The spread between it and the equivalent ten-year US Treasury bond is the largest in 25 years. The yield on German five-year bonds fell to a record low of minus 0.125pc compared to the yield on equivalent US treasuries of 1.6pc.

The yield on French ten-year bonds also went below 0.5pc, and yields on government debt in Spain, Italy, Finland and Austria also fell to record lows.

According to Draghi, by lowering interest rates, the asset-purchasing programme will create the conditions for a revival of business investment in the real economy. In fact, the ECB’s intervention is financing massive speculation, in which investors figure that even though the prices at which they purchase bonds are at record highs (with yields correspondingly at record lows), they will be able to make money through capital gains by selling the bonds they have purchased at even higher prices.

The ECB programme is pushing the dollar higher against all major global currencies. There are growing concerns that the higher dollar is worsening the international competitive position of US corporations and impacting their bottom line.

These profit concerns appear to be behind the recent falls on Wall Street, coupled with fear that an ostensibly favourable US jobs report recently will encourage the Fed to begin lifting official interest rates from their current record low level of 0.25pc. It is a sign of the way in which the financial markets have entered a ‘through the looking glass world, that what should be a sign of an improving real economy gives rise to a stock market fall.

The rise in the dollar’s value has reignited fears that so-called emerging markets could face financial problems because the more expensive dollar increases the real debt and interest burden from by dollar-denominated loans. In 2013, emerging market currencies fell sharply following indications by the US Federal Reserve that it was going to wind down its asset-purchasing programme. Now there are signs that the ‘taper tantrum’ could be repeated.

A JPMorgan analyst told the Financial Times that if the Fed lifts interest rates, the money that has flowed into emerging markets over the past two years could rush for the exit.

Both the Turkish lira and the Mexican peso have fallen to record lows against the dollar. The Brazilian real is down to a ten-and-a-half-year low against the dollar, while the South African rand is approaching its lowest point in 14 years. The Indonesian rupiah is trading at levels last seen in the Asian financial crisis of 1997-98.

All these trends will be reinforced by the ECB’s asset-purchasing programme and there are also growing risks for major European financial institutions.

Published in Dawn, Economic & Business, March 16th, 2015

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