The European Central Bank's decision to buy government bonds in the secondary markets will likely stop speculators, but it may push the euro down by more than 10 percent, traders and economists said Thursday.
Central banks in the euro zone have already started buying the bonds, helping lower yields on Greek, Portuguese, Irish and Spanish debt. Those yields spiked following fears of a credit crisis in the single currency area.
Some analysts, especially in the US, are worried that the ECB's move amounts to printing money, which the central bank promised not to do.
"Let's face it, the ECB and the euro zone have just printed a lot of money, we've been doing it at this end," Arthur Hogan, global equity product strategist at Jefferies in the US, said.
But analysts in Europe disagree, saying that inflationary pressures are under control as long as the ECB will be taking money out of the markets via deposit auctions or other measures.
"I don't think they're printing money, because they said they'll sterilize it," Martin van Vliet, euro economist with ING Bank, told CNBC.com. "The effect on total liquidity will be neutral."
The goal of the euro zone bond buying is different from that of the Federal Reserve or the Bank of England, some analysts argue, because instead of stimulating the economy the ECB only wants to scare off speculators.
"The risk to speculate against the government is high now because you have an ECB quarterback in the background," Stefan Schneider, euro zone analyst at Deutsche Bank, told CNBC.com.
Confidence in Euro Hurt
But the ECB will have to keep buying government bonds for a long time before investors' confidence is restored, he added.
"I think this procedure might be in place for several years," van Vliet said. "But that doesn't mean they'll be active every day. They have this bazooka in their pocket."
The central bank did not give details of how much it is prepared to spend, what maturities it will target and from what countries.
Since Monday, central banks in the euro zone have been buying Portuguese, Greek and Irish debt across all maturities up to 10-year bonds for amounts of 25 million or 50 million euros at a time ($32 million to $64 million), according to dealers, but specific amounts or types of debt bought are not available officially.
"I think they should keep that secret," said Schneider.
Buying too much debt could spook investors worried about inflation, and too little would invite renewed attacks by speculators, he explained.
But the European currency is suffering the consequences of European Union indecision about bailing out Greece, members' reluctance to deal with bloated budget deficits and the ECB's hesitant steps in containing the crisis, analysts said.
Last Thursday at the ECB's news conference, President Jean-Claude Trichet said the option of buying bonds had not been discussed.
"Confidence in the euro has been hurt," van Vliet said.
The silver lining of the single currency's weakness — a boost to exports — is not likely to offset the negative effect on growth as consumers lose confidence after seeing months and months of catastrophic headlines about the debt issue, he said.
The euro's fall is likely to accelerate, according to traders.
"They're buying bonds, they're pumping money into the system… it's four months where I'm looking at a 10 to 12 percent depreciation in the euro and it may go beyond that," Andrew Busch, global currency strategist at BMO Capital Markets in Chicago, told CNBC.
The ECB will continue on this path until the European financial system normalizes, and then it will have to shrink its balance sheet very quickly, to avoid inflation taking root, Schneider said, adding that an exact time frame for this is impossible to predict.
"We will know the system is normalizing when we see credit growth," he said.